Yes, a person's credit score can be impacted negatively (i.e., lowered) by canceling a credit card. Many people will need to consider this carefully as credit card companies change their price structure with new and/or higher fees.
There are two possible ways a credit score can be negatively affected by canceling a credit card:
1. If it's an older card and is one that you've held the longest of all your cards, your history of credit use will be shortened when an old card is canceled. Credit history counts for 10% of a person's credit score.
2. The credit limit on your credit cards helps establish your "credit utilization ratio." This is the percentage of your total available credit that you have charged. For example, $2,000 of charges with credit cards that have a total of $10,000 of available credit (i.e., two bank cards with $5,000 limits) is a ratio of 20% ($2,000 divided by $10,000). If you cancel a card and only have $5,000 of available credit, the ratio jacks up to 40% ($2,000 divided by $5,000), which is a bit on the high side and will probably lower your credit score a bit. Credit utilization ratios determine 30% of a credit score. Many financial experts advise consumers to keep their credit utilization ratios below 25% or 30%. Of course, this factor is only an issue in credit scores if you carry a balance from month to month.
Be sure to check all the fine print in documents related to your credit card contract. If the card issuer institutes an annual fee, say $50, you might not want to pay $50 a year to leave a card idle "on the books."
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