Can canceling an old card hurt your credit score?

This post comes from partner blog The Dough Roller.

A reader recently e-mailed me with a question about credit cards and his FICO credit score. Here's his question:

I have a question relating to annual credit card fees. One of my credit cards that I got about seven years ago with HSBC has an annual fee of $37. I have developed positive credit history with it and it has a $1,400 limit and no rewards. I have since managed to get other credit cards with no annual fees and higher limits. My dilemma is whether i should close it down and take a hit on my credit score or keep it and continue to be charged the annual fee.

I confess that this question stumped me for a while. But a recent article by George Mannes, a senior editor at Money magazine, helped answer this reader's question. The short answer is that canceling the card may lower your credit score, but in most cases won't have a big impact.

Of course, the devil is in the details, so let's dig a little deeper.

Your FICO credit score is composed of five factors: your payment history, amounts you owe, length of credit history, new credit, and types of credit you’ve used. The three factors at issue here are your payment history, which makes up 35% of your score; length of credit history, which makes up 15% of your score; and amounts you owe (and proportion of credit lines used), which accounts for 30% of your credit score.

• Bing: How your credit score is calculated

How does closing your credit card affect these factors? Perhaps less than you think. The big negative impact on your score results from the percentage of available credit you lose by closing the account. If the card represented a significant percentage of your available credit, closing the account will hurt this aspect of your credit score.

But on the positive side, your good history with the credit card with not disappear, at least not right away. Most information, both good and bad, remains on your credit report for at least seven years. In fact, according to the article referenced above, the good stuff in your report stays put for 10 years. Most bad stuff falls off the radar after seven years. Chances are that by that point it won’t matter much anyway if you’ve already started building a strong credit history and FICO score.

• Calculate your credit score

Before closing the account, however, there are some practical considerations to review. First, it's worth a few minutes of your time to contact your credit card company to see if you can either have the annual fee waived or have your card converted to a no-fee credit card offer. For example, when I found out that American Express launched the Premier Gold card with rewards much better than the Preferred Gold Card I'd been carrying, I called AmEx and asked to switch. They accommodated my request without any fuss. If you can get the annual fee waived, your available credit won't drop as it would if you closed the account.

Second, if you decide to close the account, consider the timing. If you plan to purchase or refinance a home soon, for example, you may want to wait until that transaction closes before closing the credit card account.

Third, it's worth considering how the loss of the card will affect your available credit. For example, if you don’t charge a lot on your credit cards, whether you have $12,000 in total available credit with the card or, say, $10,000 if you cancel it, you’re still not using much of your available credit. However, if you have a large balance -- even if you pay it off every month -- the loss of $2,000 of available credit could have a more significant effect on your credit score.

Related reading at The Dough Roller:

• 0% balance transfer for 15 months
• How to switch banks in 5 easy steps
• FNBO Direct review