Before dumping a credit card, consider impact on your credit score

If your favorite restaurant dismissed its longtime chef, hired surly waiters and raised its prices, you would probably stop eating there. That’s the beauty of the free-market system: Dissatisfied customers can vote with their feet.

But many consumers who have been treated badly by their credit card companies feel they don’t have that option. That’s because closing a credit card account, while emotionally satisfying, could hurt your credit score. That, in turn, could raise the cost of getting a mortgage, car loan or even a new credit card.

In the past, the most effective way around this problem was to pay off the balance and stop using the card. As long as the account remained open, your credit score would remain unscathed. But increasingly, that strategy carries a cost.

In response to credit card reforms that take effect Feb. 22, credit card companies are looking for new ways to raise revenue. Some are adding annual fees. Others have started charging inactivity fees if customers fail to use their card during a specified period. It sounds like a scene from a Mafia movie: Pay the fee or your credit score gets whacked.

But the impact of closing an account varies, depending on your credit profile, says John Ulzheimer, president of consumer education for Credit.com. Some consumers can close an account without hurting their credit score at all, he says. Others could see their scores decline by a few points, but not enough to make a difference.

Here are some things to consider before you tell your credit card issuer to take a hike:

• Your total available credit. Closing a credit card account could hurt your score because of what’s known as the credit utilization ratio. This ratio is based on the amount of debt you have outstanding as a percentage of your available credit. Closing a credit card account reduces your available credit, leading to a higher utilization rate.

Opening accounts to increase available credit is a bad idea, says Craig Watts, spokesman for Fair Isaac, which developed the widely used FICO score: “Any time you open a new account, your credit score is likely to drop a few points, because statistically, you’re riskier.” However, if you already have several credit cards with large credit lines and pay off your balances every month, closing one account may not affect your score, Ulzheimer says.

To determine how closing a card will affect your utilization ratio, get out a calculator and copies of all your credit card statements. Add up how much available credit you have and how much you’re using. Then subtract the available credit from the account you’d like to close. Ideally, you should have a credit utilization rate of 30 percent or lower.

• Your credit score. Consumers with excellent credit scores can afford to lose a few points, Ulzheimer says. FICO scores range from 300 to 850. If your score is 825, closing an account probably won’t affect your ability to get a loan. You can purchase your FICO scores from www.myfico.com.

The credit bureaus also sell scores, although they often bundle them with credit-monitoring services, so make sure you understand what you’re buying. Credit Karma (creditkarma.com), Credit.com and Quizzle (quizzle.com) provide free credit profiles. These sites don’t provide a FICO score, but they provide an idea of where you stand.

• Your borrowing plans. If you have a score in the mid-700s or higher, and you’re not planning to apply for a loan any time soon, “You should feel free to close accounts, open accounts, as you see fit,” Watts says. But suppose you’re thinking of refinancing your mortgage within the next few months or plan to buy a new car. The wisest course of action is to avoid closing any credit card accounts until you’ve been approved for your loan, Watts says.

In the wake of the credit crisis, lenders are paying more attention to credit scores than ever. Ideally, you want a score in the high 700s, or even low 800s, to get the best deals, he says. Many consumers fear that closing a credit card account will hurt their credit history, which accounts for 15 percent of the FICO score. But when you close an account, it doesn’t disappear from your credit record. The credit bureaus will keep a record of your history with that account for about a decade after it’s closed.

“Then it will stop affecting your score, but who is thinking 10 years ahead?” Watts says. “That’s a moot issue.”

© Copyright 2010 USA TODAY, a division of Gannett Co. Inc., Sandra Block.