Many consumers have told me they're so outraged that their issuers have lowered their limits that they want to fight back by closing their accounts. But what would this do to their scores? I put that question and a few others to Craig Watts, FICO public affairs director. Here's what he had to say:
Q: Will it lower my score if my lender (and not me) closes my credit account?
A: No. It doesn't matter to your FICO score who closed the account.
Q: Will closing a card account shorten my credit history?
A: No. Credit bureaus keep records of closed accounts in consumer credit files for years (seven years for negative information, longer for positive information). So a closed account will continue to appear on your credit report where it is accessible for the calculation of FICO scores. Those scores do consider the age of both open and closed accounts when determining the length of your credit history.
Q: Will closing a card account increase my credit utilization rate, thereby causing my score to drop?
A: Not necessarily. A large percentage of adults (roughly one-third, based on FICO's studies) habitually uses less than 10 percent of their total revolving credit. Having a utilization ratio that low means, among other things, that closing a card account is less likely to change your overall utilization rate. The situation changes if you had only one card account to start with, or if you have multiple cards with high reported balances, and so on.
Q: If I close a card account that still shows a balance, how will that affect my score?
A: The reported outstanding balance of your closed account will continue to influence your overall credit utilization rate, so paying off that balance should continue to be a priority. If you miss a payment and are reported 30 days late on that closed account, the delinquency will hurt your score. So to maintain a good score, you should treat that balance on the closed account with the same respect that you give your active credit accounts.
Whether a card closure or credit line cut will affect your FICO score depends on what else is in your credit report. But at least the FICO study shows that if you're using credit as wisely as possible, reduced credit limits shouldn't give you a credit panic attack.