New myth: Closing a credit card account always hurts your score

Payment info, good or bad, sticks with you


Speaking of Credit
Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
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Dear Speaking of Credit,
I have a balance of over $14,000 on one credit card. I am struggling with the monthly payment and the high interest rate, 17.99 percent. I've never had a large balance ever, but vulnerable me loaned the card out to a trusted friend. I have kept my credit report in excellent standing all my life. At present my score is 788. They have been making the payments so far, but over $200 a month goes to interest. At this rate, it will never get paid, and I am at the point in my life I want to buy some property and get settled. I called the credit card company and they offered to lower the monthly payment to $252, with no interest, no late fees, etc., but I have to close the account out. I know this affects my score, which sickens me. It will actually be two accounts, as I have two cards with the company.

I have always used my credit responsibly, and am not willing to let my credit go bad over this. I need to know if there is anything else I can do to remedy this and lower the interest without closing the account. I hope you can guide me. Thanks -- Becky


Dear Becky,
I commend you for being a very generous and understanding friend! Fortunately, you've been offered a good way out of this jam by the credit card company, and I'm going to explain why I think you should take advantage of it, despite their requirement that you close the two cards you have with them.

While I also commend you on your concern for what might happen to your credit score upon closing the two cards, I'll begin by dispelling the common myth that closing credit cards always damages credit scores. While it can happen, this somewhat exaggerated fear seems to be the most recent swing of a pendulum that has gone back and forth over the years between those who used to recommend closing cards to reduce the temptation to charge and those who now say doing so is a sure way to see your score suffer.

Let's take a look at how your score may and may not be impacted by closing a credit card over the short, medium and long terms, and what steps you can take to protect your score.

In the short term, just as with an open card, a closed card with a balance and limit continues to be included in credit utilization (balance/limit ratio) calculations, which are some of the most heavily weighted categories of scoring, counting for almost 30 percent. Then once the balance is paid off the card is removed from utilization calculations entirely.

In the medium term, the utilization percentage on a closed card that started out high will have been paid down over time to the point where it will begin helping the score much more than when first closed. So, even if you had high utilization at the time you closed the card, your score should have improved over this time period and will keep doing so, as long as all payments are being made on time, other balances are being kept low, and very few new accounts are being opened.

In the long term, your closed cards will continue to contribute to your credit score for the entire time they appear on your credit report, typically about 10 years after closing. Open and active cards, on the other hand, can remain on your report indefinitely, making it a good idea to have a few additional cards that remain open and active for as long as possible. This way, when the two closed cards drop off your credit report, your score won't be affected by that loss of credit history.

Based on what you've said about your credit situation, I don't see your score dropping from closing the two accounts, unless you have other cards with high balances, or the card company insists on lowering the credit limits, which could cause your utilization to increase with the balance then being over limit. Yet, even if closing the cards were to hurt your score through increased utilization, not only would any such drop only be temporary, as I described above, but the saving of $200 per month in interest will do your finances a lot more good than a few more short-term points on your credit score.

Hope this helps. I wish you the best!

See related: How to cancel a credit card account

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Published: July 31, 2014

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