Cancelling credit card will lower FICO score for how long?

[questions]

I have a question, when you pay off a credit card do you recommend to cancel it or keep it open? I can’t get a straight answer from my bank. I’ve read that it lowers your FICO score, but for how long? I can’t seem to get an answer to that either. I’m on the journey to be debt free in 2 years and 1 month, and I just paid off one credit card. What have you done in the past with your cards? I’ve looked through your site, but I couldn’t find an answer to that question.

[jpg7n16]

That's because there is no such thing as a straight answer to that question. It all depends on why you might need the card, if there is an annual fee on it, the level of savings you have built up, the number of other cards you currently have, etc.

For instance, if you have very little in savings - you need all the available credit you can get in case of an emergency. But if you have a proper EF in place, as we recommend of 3-6 months expenses - then you don't really need the available credit as much. So in scenario 1, you should keep the card, in scenario 2 you would be more inclined to close it.

You should make your financial decisions concerning your credit cards mainly on how they affect your overall financial picture, then as a minor consideration how it affects your credit score.

And you might want to re-read that paragraph.

Do I need the credit available? Am I being charged a fee for this card that I will not use as I have ample available credit on other cards? Would closing this card help me psychologically on my quest to get out of debt?

As you can see - there is no such thing as a straight answer to this question.

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The FICO scoring is tricky. Let me give you 2 scenarios where the change to your score would be different. 1) You have $0 balances on all your cards - and you have several, and use only a low portion of the credit line (<25%) each month, paying off the balance in full at the end of the month; or 2) You have a few cards maxed out or near the max, and this is the first card you were able to pay off in full.

In scenario 1, your score may go up or down, as the debt utilization will remain constant, but the number of cards would go down. If you had a ton of open cards, closing one may help reduce your riskiness, and thus raise your score. I'm really not sure how FICO would treat that scenario.

But scenario 2, your score would definitely go down, as closing the available credit pushes your debt utilization up towards say 90%. Which is too high, which is considered risky, which lowers the score. For sure this scenario would adversely affect the score.

FICO scoring is tricky. You can use CreditKarma.com (free site) and it has a 'credit score impact' calculator to give you a rough estimate of what would happen if you did X.

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What have I done with my cards? I have one credit card. I pay it off in full each month, and rarely use it - except for some subscriptions I already had set up on it, or just happen to grab it in my wallet by chance. I primarily use my debit card for just about everything (except rent).

I do not care what my credit score is.

[MonkeyMama]

This is an "it depends" questions.

I personally always close any old cards when I am done with them. My FICO profile is a mortgage and 2 credit cards (paid in full every month). My "current open credit history" is only a year or 2 (even my mortgage is new with a recent refinance), but I find that my credit utilization (less than 10%) and my high FICO score factor far more than any point drop in closing cards. If I close a really old card (I just did) my score may drop 20-30 points, but only for about a year. So my score went from 820 to 790, and then creeps back up every month until it is back where it started. Big whoop! Basically, it means nothing when your score is high to begin with. Also, FICO is not really clear on how their score works, 100%. I have heard over and over (mostly from lenders and bankers, mind you) that is impossible to have a high credit score with only 1-2 years of open credit history. To that, I Call B.S.! If nothing else, I have 10 years of great credit history on my credit reports (good credit stays on your reports for 10 years). That seems to reflect on my FICO score, somehow. Even if most the accounts are closed, today. (Lenders will also tell you that you need an auto loan for a high FICO score. Sorry, never had an auto loan!)

If you are paying off debt and maybe have a lower score to begin with, that is a whole other ball of wax. As mentioned, be extra careful of your utilization rate (which is a big piece of the score). You may want to keep old cards opened to keep up your score, but it depends how many cards you have. You may be better off in some cases to reduce your available credit and number of cards.

I think you would get more useful advice if you shared your current credit score and number of cards and credit limits. (Plus any other loans you may have that affect your FICO). Then you could get custom advice on how best to rasie your own FICO score.