I received a letter from my credit card issuer the other day that indicated they were closing my account due to inactivity. It didn’t bother me really, because this is a credit card that I had paid off and never used. However, it was a card I’ve had since 2000 and I was concerned that the canceled card may negatively affect my credit score.
Do Canceled Credit Cards Affect FICO Scores?
The short answer is yes, closing a credit card can affect your FICO score. But the effects on your score are determined by a couple different criteria, so it is important to weigh the pros and cons before closing credit card accounts yourself. If your bank closes them, particularly for reasons such as inactivity, you may want to contact the bank and ask to have your card restored. Here’s why.
The length of time your accounts have been opened ranks third highest in the various factors used to determine your FICO score. Closing an old credit card account effectively reduces the average age of your credit history and can reduce your credit score accordingly. However, closing new accounts can have the opposite effect.
Before you go canceling all of your new credit cards, consider that credit utilization also plays a role in determining your FICO score. Let’s say you owe $2,000 on a credit card, and nothing on a second card, both with a $5,000 credit limit. Your current total credit utilization is 20% (anything less than 30% is considered ideal, in terms of scoring models). One of those accounts was opened last year, and after running up a couple hundred dollars you paid it off and it sat in your sock drawer. The other credit card, the one with a remaining balance, is five years old. The issuer of the newer, debt-free card closes your account due to inactivity, increasing the average age of your active accounts. However, your credit utilization now jumps to 40%, well above the 30% threshold between helping your score and dragging it down.
If this happens to you, act quickly by contacting the credit card issuer and asking for the account to be reopened. They may ask for authorization to check your credit report to make sure you haven’t declared bankruptcy in the last couple months, and in most cases will reopen the account under the agreement that you use the credit card at least a couple times a year.
To avoid this scenario, use credit cards a few times a year to fill up at the gas station and then pay the bill off when it arrives. You won’t be carrying a balance, but you will show signs of activity. That is usually enough to keep credit card issuers happy, and your FICO score intact.