How closing cards and student loans affects FICO scores

Keeping cards active and paying loans on time is best way to maintain score

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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Question for the expert

Dear Speaking of Credit,
Will closing my credit cards, with a balance of zero, affect my credit score? Do student loans affect my credit score in any way? I'm not using my credit card to pay off my student loans. I want to close these cards because of the high interest rates and possibly open a new one where I would have a lower interest rate or receive reward points/cash back. I currently have a Macy's card and JC Penny card and want to get rid of them. Thank you.  -- Than

Answer for the expert

Dear Than,
You might think that such simple questions -- asking whether to close credit cards and whether student loans affect your credit score -- would bring simple answers. Well, let's just say I'm still searching for the credit scoring question that can be answered with a simple reply. With that in mind, as simply as possible I'm going to provide a couple of examples of how closing cards can impact scores. In response to your student loan question, I'll discuss some of the similarities and differences in how credit scorers consider the two major types of credit: revolving (cards) and installment (student, auto and mortgage loans).

Having written plenty in the past about the general impact of closing credit cards, this time I'm going to provide some very specific examples that you can apply to your own credit card situation, regardless of how many cards or what kind of credit limits you have. With these examples, I hope to help guide some of your future credit card management decisions in ways that will keep your credit score as high as it can be.

To your first question, I'll cut right to the chase by saying that closing cards with zero balances will not affect your score -- unless and this is a big "unless" -- you carry balances on any of your other cards. That is if all of your cards have zero balances then you have nothing to worry about, whether you close cards or leave them open. However, if your credit reports show balances on any other cards then read on, as closing cards could hurt your score if you're not careful.

When considering the scoring impacts of open versus closed cards, the scorer mostly looks at the credit utilization (card balance/limit ratio) calculations that make up 30 percent of your credit score. Credit utilization is the scoring formula's way of assessing how much of your available credit is being used, with lower utilization leading to a higher score.

To answer your open versus closed cards question further, the following "before and after" scenarios will illustrate how impacts to utilization from closing cards can differ substantially, depending on whether or not you carry balances on any of your cards.

Scenario 1 (both cards have $0 balances):
Both cards A and B are open. Both have $0 balances. Combined utilization is 0%.

Before: Both cards open Balance Limit Utilization
Card A $0 $1,000 0% ($0/$1,000)
Card B $0 $1,000 0% ($0/$1,000)
Total $0 $2,000 0% ($0/$2,000)

Card A is then closed, while Card B is left open. Both have $0 balances. Combined utilization remains at 0 percent.

After: Card A closed Balance Limit Utilization
Card A $0 $1,000 0% ($0/$1,000)
Card B $0 $1,000 0% ($0/$1,000)
Total $0 $1,000 0% ($0/$1,000)

Result: In scenario #1, despite removing $1,000 of available credit, which is what happens when you close $0 balance cards, there is no impact to utilization from closing Card A.

Scenario 2 (one card carries a balance):
Both cards are open. Card A has a $0 balance, while Card B carries a $500 balance. Combined utilization is then 25 percent.

Before: Both cards open Balance Limit Utilization
Card A $0 $1,000 0% ($0/$1,000)
Card B $500 $1,000 50% ($500/$1,000)
Total $500 $2,000 25% ($500/$2,000)

Card A is then closed, while Card B is left open. Combined utilization increases to 50 percent.

After: Card A closed Balance Limit Utilization
Card A $0 $1,000 0% ($0/$1,000)
Card B $500 $1,000 50% ($500/$1,000)
Total $500 $1,000 50% ($500/$1,000)

Result: In scenario #2, removing $1,000 of available credit from the balance/limit calculations doubles the utilization percentage from 25 to 50 percent, despite the same amount of debt. While a doubling of the utilization percentage will not occur with every closed card, and your mileage will certainly vary in these situations, the simplest lesson to learn from this exercise is to keep cards open whenever possible, especially if you tend to carry balances on other cards.

To your second question, student and other installment type loans, such as auto and mortgage, will affect your score just like credit cards in some scoring categories -- payment history, length of credit history, and new accounts, for example -- and differently in others, such as amounts owed and inquiries.

The most critical scoring distinction between cards and loans tends to be within the amounts-owed category, where loan debt carries far less scoring weight than credit card debt, which includes credit utilization and some other debt-measuring calculations. For this reason, if you ever want to help your score by paying down some of your debt above and beyond the minimum payment, always pay your credit card balances before any loan debt.

Another difference between loan and card treatment that's helpful to know, especially when you're about to shop for a student, auto or mortgage loan, are the ways in which credit inquiries affect scores for these two types of credit. While no inquiries of any kind that are more than a year old will ever count in a credit score, any card inquiry from an application for credit (a hard inquiry) incurred during the past 12 months can potentially impact your score. For loans, inquiries are ignored for the first 30 days, after which only one inquiry incurred within any 14-45 (depending on the scoring model) day period can impact the score.

No doubt, this kind of information can seem anything but simple, especially when you haven't been immersed in it for decades as I have. So, let me just summarize by saying that in addition to making all card and loan payments on time each month, if you want to play it safe with your credit score, keep as many of your cards as possible open and active -- even if you don't currently carry any card balances -- to prevent, or at least minimize, any future increase in your credit card utilization percentage.You never know when a major purchase might require you to run a balance on a credit card from month to month.

Hope I've given you some helpful information. Best of luck!

See related: Will canceling cards hurt a great credit score?, Using plastic to pay off student loans: A bad idea,

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Updated: 03-26-2019