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Closed credit card accounts and your credit score

Question: I have repeatedly heard what you confirmed last week: Closing a credit card can negatively impact your credit score. The obvious question is Why? Better: Why in the world? Brenda, Newtonville, MA

Answer: Why indeed? I'm with you. The reason has to do with this table. The figures come from Fair Isaac, the creator of the FICO credit score, the 800-pound gorilla of the industry.

A Credit Score Comes From:

Payment history: 35%
Amounts owed: 30%
Length of credit history: 15%
New credit: 10%
Types of credit use: 10%

The "Amounts owed" category, which makes up almost a third of the credit score calculation, takes into account the amount of debt you owe relative to your total credit limits. It's called your "utilization ratio." In the short run, when you close a credit card account or it is closed by the issuer the total credit available to you falls but the debt remains the same. In other words, your ratio of debt to credit limits is immediately worse. Of course, you can improve that ratio by paying down the debt. That's why the negative impact usually doesn't last long.

There is another reason that can come into play over the long haul. However, I doubt if it actually hurts many credit scores in the real world. If you had the closed credit card for a long time, it showed a good credit history and there is a $0 balance after 10 years the good credit news is deleted from your credit reports or history.

Want to learn more about the commonsense-less world of credit scoring? This article by bankrate.com is a good tutorial on credit scoring from Fair Isaac's perspective.

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