Will closing a credit card lower my score?

If all of your cards have zero balances then you have nothing to worry about, whether you close cards or leave them open. However, if your credit reports show balances on any other cards then read on, as closing cards could hurt your score if you're not careful.

Credit utilization is the scoring formula's way of assessing how much of your available credit is being used, with lower utilization leading to a higher score.

The following "before and after" scenarios will illustrate how impacts to utilization from closing cards can differ substantially, depending on whether or not you carry balances on any of your cards.

Scenario 1 (both cards have $0 balances): 
Both cards A and B are open. Both have $0 balances. Combined utilization is 0%. 

Card A is then closed, while Card B is left open. Both have $0 balances. Combined utilization remains at 0%.

Result: In scenario #1, despite removing $1,000 of available credit, which is what happens when you close $0 balance cards, there is no impact to utilization from closing Card A.

Scenario 2 (one card carries a balance): 
Both cards are open. Card A has a $0 balance, while Card B carries a $500 balance. Combined utilization is then 25%.

Card A is then closed, while Card B is left open. Combined utilization increases to 50%.
 

Result: In scenario #2, removing $1,000 of available credit from the balance/limit calculations doubles the utilization percentage from 25 to 50%, despite the same amount of debt. While a doubling of the utilization percentage will not occur with every closed card, and your mileage will certainly vary in these situations, the simplest lesson to learn from this exercise is to keep cards open whenever possible, especially if you tend to carry balances on other cards.

How Credit Impacts Your Day-to-Day Life

Credit influences many things that affect our daily lives, including our home and job. Prepare your credit for apartment hunting, job applications, insurance shopping, and opening new utility accounts. 

 Apartments

Your credit report is often pulled by a landlord or rental agency as part of the review process. They will also check that the name, address, and employer on your report match what you put on your application.

Auto loans 

Your credit score commonly influences auto loan rates available to you.

Cell phones

Cell phone companies will check your credit score before deciding to grant you a service plan. People with credit issues may be asked to put down a large down payment or pay extra for a service contract.

Child support enforcement agencies

Child support enforcement agencies can check the credit histories and child support payment records of delinquent parents. Non-payment can damage credit scores.

Credit cards

When you apply for a new credit card, the company will review your credit score to see if you qualify and what terms you should receive. Credit card companies often review the credit scores of existing customers and in turn may adjust their rates.

Employers

Employers must get written permission before they can review an applicant's credit report. Usually employers review your credit report for major negative records or discrepancies.

Government assistance and licensing

Technically, any government agency can access limited information from your credit files without your permission (name, address, former addresses, current and former employers).

Insurance

Home and auto insurers commonly use consumer credit information along with your application data in determining rates and terms. In fact, more than 90% of auto insurance companies now use credit data.

Mortgages

Mortgage lenders usually review all three of your credit reports and credit scores as part of the application process.

Utility Accounts

Electricity, cable, and other utility companies may check your credit report with your permission when determining your rates. People with credit issues could be required to put down a deposit, add a co-signer, or pay higher rates for their utilities