Debt Utilization Ratio
The biggest negative impact on your credit score as a result of closing a credit card account may come from increases to your debt utilization ratio. Debt utilization demonstrates the relationship between how much debt you have and how much credit is available to you. If you carry balances on your cards and you close an account, your debt utilization may leap. This figure is weighted at 35 percent of your credit score, so it's important to pay off any accounts if you do decide to close them, to minimize damage to your credit.
Length of Credit
The length of your credit history accounts for about 15 percent of your credit score. If the account is an older one, closing it may have a negative impact on your credit score. If you are going to close a credit card account, verify that it's not one of your older accounts, or you may see your score drop.
Credit Report
For the consumer considering closing an account in a bid to switch to one with a lower rate, he should think twice as doing so may signal that he is a high credit risk to future lenders. Instead, contact your creditor and ask if it can match the new card's interest rate.
Considerations
If you do decide to close a credit card account, it's vital to do so the right way. According to Bankrate writer Lucy Lazarony, you should only cancel cards that don't have a balance. If you cancel while you still have a balance, you may risk interest rate hikes to the maximum rate allowed. Consumers who are considering a large loan, such as a mortgage or car loan, may find it more difficult to obtain new credit with favorable loan terms after closing credit card accounts. If you want to take out a large loan, you should wait until after approval to close your accounts.
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