How Opening and Closing Credit Cards Affects Your Credit Score

You’ve probably heard that opening or closing credit cards is something you should avoid because it can affect your credit score. But do you know how and why it affects your score?

Let’s take a closer look at the pros and cons of opening a new credit card and closing an old credit card as it relates to your credit score, specifically your FICO credit score.

OPENING A NEW CREDIT CARD

To get an idea of how much new credit is part of your credit score, consider this: The category New Credit is 10 percent of your FICO credit score and the category Length of Credit History is 15 percent of your score. Applying for—and getting—a new credit card can affect your credit score in a number of different ways. For example, when you apply for a new card, an inquiry is made into your credit and that inquiry can lower your score by a few points. Your FICO credit score can also get dinged if you have too many new credit card accounts, if you’ve recently opened new accounts and if the average age of your total accounts is too low.

On the flip side, opening a new credit card can be helpful at times. The FICO category Credit Mix is 10 percent of your score and it can be beneficial to have different types of credit, such as mortgages, student loans, auto loans, home equity lines of credit—and credit cards. Also, you may need to open a new credit card in order to build up your credit, if you have little or no credit history.

CLOSING A CREDIT CARD

Since Length of Credit History is 15 percent of your score, you’ll benefit from a longer credit history if you keep all of your credit card accounts open, especially if you have a card that’s been open for a long time. Another reason for keeping all of your cards open is because it’s beneficial to have a low credit utilization ratio, which is the ratio of all of your credit card balances to all of your credit card limits. By keeping your credit card accounts open, you’ll have more available credit and thus a lower ratio. Your credit utilization ratio falls under the FICO category of Amounts Owed, which is 30 percent of your credit score.

There are times, however, when closing a credit card makes sense. You may need to close a card to avoid a high annual fee, to get a better interest rate on balances or to avoid the temptation to overspend. Although closing an account will affect your credit score, it’s likely just a temporary hit.

For more information about your credit score, talk to your mortgage professional.

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For more than 25 years, Omega Financial has been serving mortgage clients in Massachusetts. Our brokers have approximately 50 years in the mortgage business. You always will receive fast, courteous, and accurate information. Omega Financial, Inc. is a company duly licensed to operate in Massachusetts as a Mortgage Brokerage. We are located in the Town of Norwood, Massachusetts where we have been operating as Omega Financial Incorporated since 1988.

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