Why does cancelling a credit card lower your credit score?

Why does cancelling a credit card lower your credit score? This seems totally counter intuitive to me. Does any one know the reasoning behind this?

Best Answer

Now for the complete answer.

30% of your score is based on your debt to credit ratio, so if you have 3 cards with $5,000.00 limits for a total of $15,000.00 and have balances of $4,000.00 you usage is 26.66% which is under 30 and that%26#039;s where you need to keep it for the baest score.

Now, if you cancel 1 of the cards your total is reduced to $10,000.00 with the same balance so now your usage is 40% and your score takes a hit because you went over 30% usage. Finance Manager for over 8-years / 2008 edition Consumer Action Handbook.

Asker's Rating:: Outstanding explanation. Even I can understand now.

Other Answers (7)

First, there is no %26quot;reasoning%26quot; in credit score calculations. When designing the scores, they look at a pool of people who are in financial trouble and a pool of reports of people who aren%26#039;t. You get points for parts of your history that correlate to people who aren%26#039;t in trouble and they take away points for things that resemble people who are in trouble. (Actually, they look at people in trouble or in good shape now and pull archived copies of the data from the past, to make it predictive.

What the score reflects, in this case, is that good credit customers have substantial unused revolving credit and long histories with their current credit card issuer. When you close a card, you are chopping off the history for that account, and, you are reducing your unused-but-available credit.
It%26#039;s a delicate balance the credit bureaus use to determine your value. They want to see you have credit and good credit. They want to see you have accounts that you use.
Pay off- not hold balances on.

Closing an account per se doesn%26#039;t significantly lower your score- however, having balances does. So that%26#039;s a weird correlation that some idiot made up and remains in place.
All of the answers reflect some of the information. To simplify - say I have 3 credit cards - they each give me a limit of $10,000 - so I show credit available to me of $30,000. But I have charged $5000 on each of 2 of the cards - so I then show debt of $10,000 and credit available to me of $20,000. Then, I think I would benefit if I just didn%26#039;t have the 3rd card, so I cancel it. So then I show a debt of $10,000 and credit available to me of $10,000. I have essentially reduced the amount of credit available to me, and retained the same amount of debt. Its a numbers game.
Because you need to have open credit that is UN used.
so if you have a credit limit of 1000, you should never use more than 500 and you should pay more than the minimum payment each month but never pay it off completely because
that shows you can manage your money at an exceptable level on a regular basis.
A constant revolving line of credit is good - especially if you pay it on time and you have had it for years.... it%26#039;s sort of like a reference.... something they can look at and say %26quot;Hey, she manages her money and pays her bills on time - and has for the last 5 years%26quot;... when you don%26#039;t have anything (liike cutting all your credit cards - it%26#039;s like having no references and they have no proof that you are managing your money properly.... I know it sounds weird. Not saying I am crazy about the system, but that%26#039;s how it works.... it%26#039;s all numbers and the bank%26#039;s weird logic.
I know that to have high credit card score, it is important to have many CC. Also, the score goes up as you use it more and pay them on time. If there is high debt, it also brings down the score a little.

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