Canceled Cards and a Credit Score

Q. I want to close two credit cards that recently imposed an annual fee. Will this hurt my credit score?

A. Maybe, maybe not. "It depends on what else is on your credit report at the moment your next score is calculated," says Craig Watts of FICO, the company whose credit scores are most widely used by lenders in determining creditworthiness.

Although many factors arise in calculating a score, the primary consideration when closing existing accounts is the impact on your "credit utilization" — the ratio of existing credit card balances to their cumulative credit limits.

Let's say you have three credit cards, each with a $5,000 limit. If all three accounts have a zero balance at the moment you close two of them, it likely won't lower your score. "Your utilization is zero because you have no balances," explains Watts.

But say you owe $3,000 on one card and cancel the two that have zero balances. Your utilization suddenly jumps from 20 percent of the old $15,000 cumulative limit to 60 percent of the new $5,000 limit. This could ding your score. Advice: Pay off that $3,000 balance before you pull the plug on the other plastic.

One other common question in closing long-held card accounts is whether it will affect your credit history, which accounts for 15 percent of a FICO score. It's "a myth that as soon as you close a card, it becomes invisible to scoring models and you've lost 30 years of accumulated history," says Watts. "A closed account remains on your credit history, probably for another decade."

Sid Kirchheimer writes about consumer and health issues.