Closing Credit Cards?

Having a good credit score is good for so many things: getting a lower rate mortgage, getting good deals on credit cards and also for hunting a job. Some people tend to cancel their old unused credit card accounts under a wrong impression that getting rid of fat in your wallet might
improve your credit score.

Instead of closing out old accounts, leave them be. The FICO calculator looks at your credit utilization which is measured by the ratio between your credit limit and the amount of balance on your cards. This should be a fraction less than 1. As it approaches 1, you max out your cards. So, closing a old credit card reduces the amount of your available credit without paying down the amount of debt you have. This makes it appear that you are getting closer to maxxing out your cards and hurts your FICO score.

For example, if you have $10,000 of available credit on several credit cards and owe a total of $1,000, you have used 10 percent of your available credit. However, if you close accounts with $9,000 of available credit, you now have used 100 percent of your available credit, and that
isn't good for your credit score.

Sometimes, consumers seek to close out old unused cards with high interest rates just to avoid the possibility of using them. This is called 'a smart consumer point of view' but not a 'smart credit point of view'. Even if you want to cancel (may be just to have a lighter wallet or less number of things to worry about), you might be better off to close the newer cards which are not carrying your long-time credit history and thus are less important from the point of view of the FICO scoring system.