How canceled cards impact credit scores

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question for the expert Dear Opening Credits,
I have a credit report with a few cards being reporting as "canceled by consumer." I never canceled any cards. It is negatively impacting my ability to refinance. What can I do?  -- Jean

Answer for the expert Dear Jean,
How odd. If you didn't take that action, the credit issuers must have. And if so, typically they'd inform the credit reporting bureaus that they canceled them, which would be noted on your files. The only explanation is that they chose to report it this way. Perhaps you didn't use the credit cards in a long time, so they shut them down due to lack of use rather than for poor behavior. The only way you can know for sure is by asking your creditors -- so call and find out.

As for the impact the closure is having on your refinancing options, it may be less than you think.

In general, canceling a credit card account will not hurt a credit score, which a bank or other financial institution will check to see if you're eligible for the deal. The only way it might is if doing so altered your debt-to-credit-limit ratio.

To clear all this up, you have to first understand how a credit score -- and I'll use the FICO criteria as it's the most commonly used score -- is calculated.

There are five scoring categories in a FICO score. At 35 percent, your payment history is the most important. Therefore, if you've always paid on time, you're fine there.

The next weightiest category, however, is the amount of money you owe compared to how much you can borrow -- the ratio of how much debt you have compared to your credit limit. This is where you could have some trouble when open credit cards are closed.

It works this way: If you already hold balances but then decrease your borrowing power by canceling accounts (whether done by you or the creditor), your balances might suddenly be too close to your overall credit limit. Lenders typically want their customers to owe less than 30 percent of what they can borrow. Because scores are designed to help them make wise business decisions, FICO uses that ratio as a primary factor. For example, if you had the ability to charge $25,000 on one card or over several cards, owing $3,000 isn't so bad. But drop the charging ability to $5,000 with the same debt, then you instantly owe more than half of your available credit line, throwing the ratio out of whack.

The remaining three FICO categories are minor compared to the first two. They are how long you've been using credit (15 percent), the types of credit in use (10 percent) and inquiries, also called new credit (10 percent).

Mind that notice of account closure is not specifically included in the scoring process, but a credit card company charging a bad debt off is. So let's say you opened a retail account but never really used it, the balance was zero and don't want the card anymore. It would be no big deal if you or the store closed it (as long as you have very little other debt). Yet if you did charge the card up, failed to pay the bill and then the creditor canceled the account and sent the debt to collections, that would be a very big deal. Your FICO score would suffer.

So that's your credit score. If it's good, great. If it's not, figure out where you've gone wrong and change it. Maybe you need to reduce some debt (or even open a new card) to improve your utilization ratio. If the problem is some recently missed payments, get back on track by paying on time for at least six months.

Outside of your score, know that lenders won't perceive a "closed by consumer" notation to be negative, so don't worry about that. And, like with the credit issuers, the only way you can get specific information about why you're being turned down is by contacting the lenders and asking them exactly why. 

See related: Protect credit scores when canceling a credit card

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Updated: 10-19-2018