Mythbuster: Should you close a credit card account to improve your credit score?

Seeing a zero balance on a credit card statement is a great feeling, especially if you’ve worked hard to pay off that debt. At that point, you may feel like getting rid of that card completely, and you might be asking yourself, “Should I close my credit card account? Would that improve my credit score?”

The answer to both questions is no.

Although closing an account would give you less to manage, and certainly reduce the temptation to start charging on it again, closing an account won’t improve your credit score.

Instead, credit scores – which help to determine approval and interest rates on loans, and are even considered as part of some job applications – are calculated based on a number of factors. Credit score considerations include how promptly you make credit and loan payments, whether you’ve defaulted on any debts, and how often you apply for new credit. (For a comprehensive look at what goes into a credit score, see our free e-book: Building Blocks of Credit.)

The importance of credit-to-debt ratio

In addition to your payment habits, credit scores also rely on a calculation that measures your available credit against the credit you’re using. By cancelling a zero-balance credit card, you’ll be removing some of that available credit. Ultimately, this could cause your score to drop.

For example, let’s say you paid off a $10,000 credit card that you’d maxed out. You have two other credit cards, each with a $1,000 credit limit, and you owe $500 on each of them.

If you leave your zero balance card in the mix, that means that you’d have $12,000 in total credit available to you, of which you’re using less than 10%.

Available credit: $10,000 + $1,000 + $1,000 = $12,000

Debt: $500 + $500 = $1,000

Credit-to-debt ratio: $1,000 ÷ $12,000 = 8%

But if you close that high-limit card, now you only have $2,000 in credit, and you’d be using 50% of the total credit available to you.

Available credit: $1,000 + $1,000 = $2,000

Debt: $500 + $500 = $1,000

Credit-to-debt ratio: $1,000 ÷ $2,000 = 50%

Even though the debt totals are the same, that higher percentage of credit-to-debt ratio would work against you in terms of your credit score.

Longevity matters to credit scores

Also, the longer you keep the credit card, the better it reflects on your credit history. So although you might feel that you should close the credit card account, it’s probably better for your credit score to cut up the card instead, while still keeping the account active.