Credit Utilization Ratio

• Credit scores are a major component in getting future credit, including car loans and mortgages. Several factors go into your credit score, but one of the major factors is credit utilization ratio. This is the amount of your available balances compared to your credit limits. If you have a balance of $1,000 on a card that has a $2,000 limit, you have a 50 percent credit utilization ratio on that card.
  
  

Effects

• Even if you have a zero balance on a card, closing your credit cards shrinks the amount of your available credit. This affects your credit utilization ratio. For example, imagine you have two credit cards with a total available credit limit of $5,000. One has a balance of $2,500 on it, while the other has a zero balance. You have a credit utilization ratio of 50 percent. If you close the zero balance card, which has a limit of $2,500, you are left with a $2,500 balance on a card with a $2,500 credit limit on it. Your credit utilization ratio jumps from 50 to 100 percent. If you still have a balance on the card you close, the effect is even worse.
  
  

Consequences

• Many people close their cards because they think that this will help them to increase their credit score. However, the lower your credit utilization ratio is, the higher your score, so if closing a card increases your credit utilization ratio it will actually hurt your score. Lenders frown on high credit utilization because it indicates that you have a tendency to top out on your credit, which makes you a higher credit risk. The MyFICO website suggests that you keep your credit utilization ratio below 50 percent to avoid harming your credit score.
  
  

Credit History

• Closing a credit card does not remove the information and payment history for that card from your credit history. In fact, the card history may still show on your report for up to 10 years. Late payments, collections and other negative information, along with their impact on your credit score, will not suddenly disappear and your score will not suddenly rise. The impact of negative information on a closed card has to work itself out of your score over time, just as it would if you keep the card open.