Is Your Credit Score Penalized for Opening and Closing Credit Card Accounts?

Last Revised on August 17, 2011

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So you opened few more credit card accounts because you thought it would improve your credit score while helping you with financial needs as well. Now you don’t need them, and are wondering if your credit score will be penalized for both having too much credit cards on hands as well as closing those accounts. You feel like you are in a situation where taking steps towards either two of the choice you have could hurt you. Now what; we will try to explain it a bit here.

Credit Score Penalized for Too Many Open Credit Cards and Closing Credit Card Accounts.

Are you confused yet? This confusion comes from people who have many accounts of credit cards open but they aren’t using and they see their  credit score getting hurt for some reason. What they don’t realize is that this penalization might have occurred due to balance and inactivity on each of them more than how many were open at the same. How you make the payment of your bills, loan debts and credit cards monthly dues affects your credit score the most.

How does canceling credit card account hurt your credit score? Did you cancel the credit cards or the company closed them? These are two different cases. Credit card company may cancel your account for various reasons where you aren’t acting as a good creditworthy customer such as not paying bills on time or no account activity for months to years. However, if you are the one who canceled the credit cards then you might have paid all the balance and due back before the companies let you go. In such cases, it is highly unlikely your credit score will be hurt as you made the payments on time, which is the most important factor in calculating your score by credit rating agencies and bureaus. So how does cancelling or closing your credit card affect your credit score? 15% of your FICO score is based on the length of your credit history, including average age of accounts open. 30% of your score is for credit utilization.

Can you really hurt your credit score by having many open credit card accounts? It will depend, which we will explain in a second. Better yet, what if you are not using it? That means you aren’t spending money from that account at all and thus should have no balance to pay; some people might think that’s really good since you don’t owe. But if you look from the credit score agencies point of view, you are a risky borrower to say the least since you have opened an account without knowing for sure if you will need it. FICO is mysterious to some extent and most definitely, they don’t pay too much attention to this factor, if any. But still I hope you get the point – even if it does affect your credit score, it won’t negatively impact to know it did. Because it shouldn’t hurt directly. So your credit score should be good, if not average.

How long should you keep a credit card account open before you close it to keep your credit score safe? If you have many credit accounts and is upto date with the payments with all of them, then it is better to close the newest one first if you have to. This is because the longer credit history you have a company the better it is; we are talking about good credit history. Closing credit accounts that have zero account balance neither raise nor decrease your credit score though. The important thing to keep in mind here is that if you are closing a new account simply lowers your utilization ratio, period; it does not provide any history of your credit worthiness or anything, even though it might stay in record depending on how the company reports it to the credit bureaus.

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14 Responses to “Is Your Credit Score Penalized for Opening and Closing Credit Card Accounts?”

  1. Vernon Ahmir Says:
    November 28th, 2010 at 4:10 pm

    There is no penalty because the amount of money you owe on all different types of credit cards accounts are used to calculate your final FICO score. You credit score won’t be penalized as long as you manage to keep total debt stays below 30% of your personal credit line.

  2. Molly jansen Marie Says:
    December 2nd, 2010 at 10:58 pm

    I agree that unless you really need to cancel an account, it is better to keep a credit card that you have kept for a long period of time since it will add to your credit history report. Often time it is advised that you have at least one credit card which you can use even for making small purchases such as paying for a coffee. Generally speaking, it depends how the penalty for opening too many or closing credit card accounts lower your credit score.

  3. Will my credit score go down if I don’t use my credit card? Says:
    December 4th, 2010 at 7:19 pm

    I just got a credit card that I planned to use it occasionally when there is an emergency need. This means that hopefully I will rarely ever use it since I hate debt getting into bad financial situation. Does an unused line of credit hurt your credit score?

  4. Jennilyn Mcguire Says:
    December 9th, 2010 at 10:14 am

    What happens to your credit score when you cancel credit card and you are in good standing? I have never been late on payments, and have no balance whatsoever. I have many credit cards, but want to cancel one of them. If I get rid of one of these, does the credit limit on that card gets erased?
    I am worried because I have worked so hard to build credit limit on every single credit cards I have owned thus far, what will happen to my credit score? I just don’t feel secure owning that many cards.

  5. Mr Smarty Pants got his money in the bank and wallet Says:
    December 10th, 2010 at 8:58 am

    I understand that everybody has a different take on this subject of closing credit card accounts that you will be better by paying off than keeping it. I personally wouldn’t worry about it at all. You know why – I quit using credit cards before 1990. Look at his- we were able to buy a second home and a car. What helps your credit score more is a decent (not high) savings or investment account balances. These factors put you on the positive side of the balance sheet.

    Banks are going through great lengths to reduce their credit card risk and increase profits as you would imagine. Banks will use any excuse or method to justify higher interest rates and obviously that how they make their money the best way. Closing your account drops your score a little, but it is not permanent if other things are in place.

    A person with few or no credit cards is riskier than who has some open because they don’t have the potential of a large credit card debt. For example, if a person has 5 credit cards with $2,000 limits but $0 balances. That represents a potential debt load of $10,000 that may impact your ability to pay other debt obligations. That should increase your credit risk rating. You would have higher interest rates on your loans. That’s should make sense easily if you spend about a minute or two to think about it.

    Now, if that same individual close 4 of those accounts, your potential debt load is $2,000 which may be easier to handle. The problem is that the banks don’t want to see it that way. This person have lost some credit history. That’s bogus in my view and the biggest flaw in credit rating system. It’s still in your credit report. But the banks will use that as an excuse to raise you as a risk, increasing your interest rates.

    So, it doesn’t matter what you do, you will still get hit with higher interest rates on your credit cards. They are getting just as bad as payday loan companies, which is still the worst culprit victimizing poor people. Wouldn’t it be great if everyone just stopped using credit cards? Banks would not make money on interest. They won’t get the this annoying, unjustifiable, 2% tax they charge on each credit card transaction we make on purchases. This will make sure people will have enough money to live a good life.

  6. Corey Says:
    December 13th, 2010 at 7:20 am

    I monitor my credit online frequently, ive been working on my credit for 3 years now and finally had my score up to 678 well i finally got approved for a 1400 visa through my bank thinking it would help improve my score even more where i am back in a bank, well as soon as i opened my new visa my score dropped 69 points ..it is brand new no late payments nothing,,,why would it drop my score and not rise it..i would not have gotten it if i had of known this, i did not need the money did it for the credit.

    thank you

  7. Effects of Closing Credit Cards or Opening too many accounts Says:
    December 13th, 2010 at 12:43 pm

    If you are trying to keep a high credit score, then pay off your account but do not close it. Here is why: your other lines of credit reporting such as car loans, mortgage payments and other installments can factor into your credit score. However, if you close the only credit which is a revolving line you have, closing that credit card will hurt your score and not help. Just don’t use it or trying paying it on time each and every month.

    The amount of money you have in the bank will increase your credit score. Neither income nor savings are factored into your credit score. That’s why Dave Ramsey, the famous financial guru, has NO credit score. He is a millionaire that pays cash/debit card for everything. He hasn’t bought anything on credit in over 10 years, so he has NO credit score. That may work for him; but it won’t work for the bulk of the average populace. Therefore if you want to maintain your score, pay off the card and put it into the freezer if you are tempted to “overuse” it but Don’t close the account.

    A good piece of advice I have for anybody who is trying to fix their credit score is to take a look at myfico.com and explore yourself what goes into a credit score compilation. It is plain and simple.

  8. Capital One Says:
    December 15th, 2010 at 9:54 am

    I was out yesterday and when I got home I realized my wallet was’t with me, it probably got stolen in the crowd. Anyhow, my credit cards were in there, including my social security card and checks. I called to cancel my BOA and Capital One credit card that i have for more than 5 years. But now I am worrying about how my credit score will have an effect after cancelling it. I also plan to either get American Express or Discover if I get a better deal such as interest rates and fees.

  9. Eva Latrell Says:
    December 17th, 2010 at 8:18 pm

    I have been paying down credit card debt and want to shred and cancel credit cards with a zero balance. I was told that this may cause my credit score to go down. Won’t it would have the opposite effect though if you are paying off the balance.

    If you have only one credit card left but the balance on it is almost two third of the line of credit available, doesn’t it make sense to pay it off completely at the least and later maybe close it if you aren’t utilizing it. How will this effect the credit score, and how long does it take for your credit score to change once credit card is paid off? Money is bit tight right now, but I would rather live a sound financial life in few years or than by spending a lot right now and living with bad credit score to suffer with later on.

  10. Which is better option? Says:
    December 21st, 2010 at 7:04 pm

    Which is better many credit cards with low balances or few credit cards with high balances? Here is my situation; me and my husband have over thousand dollars of credit card debt; all of them are spread over 7 different credit cards. Is it better for us to to consolidate all the balances in all these cards so we have less credit cards? From a credit reporting and credit score point of view, which rout would you take. We are just worried about our financial situation right now almost every day we talk about it and discuss our plans.

  11. does cancelling unused card affect credit score? Says:
    January 3rd, 2011 at 6:18 pm

    I have few retail store cards for over a year now. They don’t have any fancy Visa, MasterCard logo or name on it so I don’t know what they are considered and how important they are. but since I don’t use them much; I would like to cancel them as I want to avoid the useless fees and charges. These are money just going down the drain. My question is does cancelling unused cards affect your credit score? How much role do they play? Also does keep cards without using them help or affect negatively?

  12. Bob Says:
    February 9th, 2011 at 9:34 pm

    I applied for a credit card for a furniture store purchase ( no interest for 24 mnths if payments are on time). I decided not to go through with the purchase, therefore I have a credit card with a $3500 limit with 0 balance. I will never use the card as the regular int rate is 29%.Would I be better off keeping the card or canceling it with regard to the effect on my credit scores?

  13. Does cancelling credit cards hurt your credit score? Says:
    February 15th, 2011 at 7:27 am

    I am thinking of getting a meijer credit card for the use of a 20 percent off coupon you get for a purchase. i have no credit history and this will be my first card as I have never owned one before it has no annual fee.

    so if i signed up to use the discount to my advantage, and then cancelled credit cards a week later, would i be able to do that, or would it even work? and would it affect and hurt my non existent credit score?

  14. Effect of not using credit card on my credit score? Says:
    August 17th, 2011 at 5:33 pm

    It sounds like a stupid question, but I recently got approved for my first credit card so it’s my first credit line. If I do not use credit card, will my credit score increase?

    Well, keep this mind if you plan on closing or canceling your credit card to improve credit scored: If you don’t use your card at all, your score will improve very slightly for a time being, but eventually your account will be in danger of having the closed for lack of use. On the other hand, if you leave it open you maybe able to achieve scoring a few points just for having an open account.

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