Your credit score is a tricky and often confusing subject. One subject of confusion for many people is how often--if ever--you should close a line of credit. Because it can affect your overall credit score, it's important to understand how credit scoring works before you cancel a credit card.
There are two main ways closing your credit can affect your overall credit score. According to FICO.com, one of the more commonly used credit scoring systems in the US, the length of your credit history accounts for 15% of your total score. If you have a credit card you never use that's also your oldest account, closing that card could drop your score a bit.
The overall amount you owe on your credit cards makes up 30% of your total credit score. It's not a bad thing to have lines of credit and owe money on them; however, your score will take a nosedive if your lines of credit are at or near their limit. It will also lower if your total amount of available credit goes down. Financial experts recommend you only use about 30% of your total available credit. Anything beyond that, and your score might be affected.
For example, let's say you have a two credit cards, both with a $1,000 limit. One card has a $0 balance, while the other has a $500 balance, giving you $2,000 of available credit. This puts your overall credit utilization at 25%, which is well within the recommended amount. Because you don't use the card with the $0 balance, you cancel it. Now, your overall available credit is just $1,000, and since you still have a $500 balance, your credit utilization is now 50%, well over the recommended 30%. As a result, your score will most likely be negatively impacted.
Most financial experts recommend that you keep accounts open. In most cases, they're not going to hurt your score and may even help it. A few times you should close a line of credit include:
You may be able to cancel a credit card online, but you should always call Customer Service to follow up, and ask for confirmation in writing as well.