Credit Utilization

• Closing a credit card account after paying it off may lower your score due to your credit utilization rate, according to the Experian credit reporting company. Determine your credit utilization by adding up the balances on all of your credit cards and comparing that total with the total limits on your cards. Someone who has two cards with a total balance of $4,000 and a combined credit limit of $10,000 has a utilization rate of 40 percent. That rate increases to 80 percent if one card is canceled and the total available credit limit drops to $5,000. In such cases, your credit score would likely drop, since it appears you're using up most of your available credit. The lower your utilization rate, the better it is for your credit score.
  
  

Credit History

• Your credit history also affects how much a canceled card might hamper your credit score. Experian indicates the impact on your score would be small if you have several other active accounts with low utilization rates in good standing included in your credit history. Furthermore, any slight drop in your score would be temporary after canceling a card if you continue to keep your other accounts in good standing. The temporary drop would be insignificant if you aren't planning anything in the near future that requires scrutinizing your credit history, such as applying for loans or other credit cards.
  
  

Account Age

• Consider the length of your credit history before you cancel a card because the age of your accounts affects 15 percent of your FICO credit score. Older accounts kept in good standing are better for your credit rating than new accounts. The account history for a card remains on your credit report even after you close the account. However, canceling a card could cause your score to drop if you have few other active accounts in good standing that demonstrate recent responsible financial management to creditors and lenders.
  
  

Considerations

• Determine whether there are sound financial reasons for closing an account before you cancel a card. For example, you may want to cancel a card to control your spending. You could harm your credit rating by closing an account unnecessarily because you may unwittingly wipe out a portion of your good credit history. Sometimes, credit bureaus automatically delete the credit history for a closed account after 10 years, according to Bankrate.com writer Leslie McFadden. However, McFadden notes that a credit card company may delete the history sooner to clear its records of inactive accounts.