If you’re thinking about closing a credit card, you may be wondering: Does closing a credit card hurt your credit? Like most financial questions, the answer is that it depends.
If you already have good to excellent credit, closing one credit card generally won’t have a huge impact on your credit score. However, there are a few scenarios where closing a credit card can hurt your credit score. We’ll explore the potential consequences of closing a credit card, as well as alternatives to explore to avoid possible impacts to your credit score.
Ways Closing Your Credit Card Can Affect Your Credit Score
If you’re worried about whether it hurts your credit to close a credit card, you should know that there are two main ways that canceling a credit card can indeed affect your credit score.
Through Credit Card Utilization Ratio
The first way that canceling a credit card affects your credit score is by lowering your credit card utilization ratio. Your utilization ratio (sometimes called your utilization percentage) is the total amount of available credit that you’re actually using. If you have a credit card with a $10,000 limit and you regularly spend $5,000 on that card each month, you’d have a utilization ratio of 50% ($5,000 divided by $10,000).
Having a low utilization ratio is generally considered a positive factor in determining your credit score.
Lenders prefer when you’re not using all of your available credit, since doing so can be an indicator of financial distress. When you cancel a credit card, you lower the total amount of your available credit line, which will generally raise your credit card utilization ratio.
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Impact on the Length of Credit History
Another way that canceling a credit card can affect your credit score is by impacting the average length of your credit history. Your average age of credit accounts is another factor in determining your credit score, with an older average being better. You’ll especially see an impact on your score if you close a card that you’ve had for a very long time — and the impacts of a bad credit score are myriad.
When Canceling a Credit Card Might Make Sense
There are several scenarios when canceling a credit card might be the right financial move, such as when:
• Your card has a steep annual fee that isn’t worth it. One of the most common reasons for when to cancel your credit card is if you have a card with an annual fee and you’re no longer getting enough in benefits to justify paying that cost. It doesn’t make sense to pay an annual fee of $100 or more a year if you’re not getting much benefit from having the card — and there are plenty of credit cards that come with no annual fee.
• You have multiple credit cards and want to streamline your finances. Another scenario is if you have multiple credit cards and want to simplify your finances. With how credit cards work, missing a payment can have a big negative impact on your credit score. So if you’re in a situation where you have too many credit cards and are having trouble keeping payments straight, it may be a good idea to simplify your life and cancel some of your credit cards.
• You have a high interest rate on a card. Particularly if you need to carry a balance for whatever reason, ditching a card with a high interest rate might be in your best interest. That will save you from paying more than necessary in interest charges.
• You want to replace a basic or secured credit card. Another reason you might consider canceling your card is if you have a very basic starter credit card, or if you have a secured credit card and want to upgrade to an unsecured card. Especially if your credit score has dramatically improved since you opened that card, you could secure better terms and potentially the opportunity to earn rewards as well.
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When It Might Make Sense to Keep the Credit Card Account Open
On the other hand, there can be good reasons to keep your credit card accounts open as well. This includes if:
• Your card doesn’t have an annual fee. If the card has no annual fee, you could always keep the card open and not use it rather than closing the account. When you close an account, the next time the credit bureaus are updating your credit score, your score may decrease. Keeping your credit card open instead will prevent that.
• You don’t have many accounts open. One of the factors that’s used to determine your credit score is your mix of accounts. If you don’t have many accounts open, closing one of your few accounts could ding you in this area, possibly dragging down your credit score. Plus, it could cause your available credit to take a big hit, which would increase your credit utilization.
• Your only reason for canceling is not using your card very often. Given the potential impacts to your credit, if you don’t have much reason to cancel a credit card, you’re likely better off keeping it open due to the importance of good credit. That way, you won’t risk driving up your credit utilization or lowering the average age of your accounts, both of which can cause your score to drop. Plus, there aren’t any penalties for not using a credit card frequently.
Guide to Closing a Credit Card Safely
To close a credit card safely, there are a few things that you’ll want to keep in mind before canceling your card.
Automatic Payments
If you have any automatic payments being charged to the card, you’ll want to contact the vendors and change them to another card, if you own multiple credit cards. Once you close your credit card account, if a vendor attempts to charge your account, the charge will likely be denied. This could lead to interruptions in other areas of your life, especially if it’s for something crucial like rent or utilities.
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Paying Your Balances in Full
Simply closing your credit card account does not eliminate your responsibility for any charges already on the account. You’re still just as responsible and liable for the total balance on your account, so you should pay off your balance in full, if possible. If you don’t pay the full balance when you close the account, your card issuer will still issue you monthly statements, and interest will continue to accrue.
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Redeeming Your Rewards
If you have a credit card that allows you to earn cash-back, travel, or other rewards, you’ll want to redeem those rewards before you close your account. Once you close your account, you may not be able to access them, and it’s possible that you will lose some of your hard-earned rewards. To avoid that possibility, you should redeem your rewards before canceling your credit card account.
Alternatives to Canceling a Credit Card
If you’re worried about how closing a credit card can hurt your credit, there are alternatives to explore.
Downgrade to a No-Fee Card
If one of the reasons you’re considering canceling your credit card is to avoid paying an annual fee, you may be able to downgrade the card instead. Many credit card issuers offer a variety of different cards, and only some of them come with annual fees. Downgrading to a no-fee card will keep your account open without having to pay the annual fee.
Negotiate With Your Credit Card Company
Another option is to negotiate with your credit card company. Most credit card issuers do not want you to cancel your card, so you may be willing to negotiate for better terms. This might include waiving the annual fee, lowering the interest rate, or getting additional rewards — it never hurts to call your credit card company to ask what they might be willing to do.
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Put Your Card Away
If you’re considering canceling your credit card because you’re worried about overspending on the card, you also have the option to just take it out of your wallet. Depending on your situation, simply placing the card in your sock drawer, for instance, might prevent you from overspending without having to actually close the account.
Check Your Credit Report Before Closing an Account
If you’ve decided to close your credit card account, you’ll want to check your credit report both before and after canceling your card. If you’re concerned about how checking your credit score affects your rating, remember that it won’t affect it.
Also keep in mind that you have different credit scores, so take some time to check each one before and after closing your account. That way, you’ll have an accurate idea of how closing your credit card affected your credit score.
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The Takeaway
While closing a credit card likely won’t have a huge impact on your credit score, it can lower it, especially in certain situations. Unless you have a good reason for closing your account, you may want to consider keeping your credit card open. Instead, you could consider downgrading to a no-fee card, negotiating with your credit card company, or just taking your card out of your wallet.
FAQ
Is closing a credit card bad?
Closing a credit card isn’t usually bad, but it also won’t help your score in most situations. Instead, consider alternatives to closing your credit card like downgrading your card or negotiating with your card issuer.
Is it better to cancel unused credit cards or keep them?
In many scenarios, it’s preferable to just keep your credit card accounts open, even if you don’t regularly use them. This allows your average age of accounts to increase and also lowers your utilization ratio by having access to a higher total of overall available credit. Both of these factors can help raise your credit score.
Does closing a credit card with a zero balance affect your credit score?
If you close a credit card, even if you have a $0 balance, your credit score might drop. This is because closing your card could lower your average age of accounts and/or increase your credit utilization ratio. Instead of canceling your credit card, consider negotiating with your card issuer for a lower interest rate or lower fees.
How much does your credit score drop if you close a credit card?
If you already have good or excellent credit, closing a credit card generally won’t have a huge impact. If you have a bad credit score already, however,it’s possible that closing a credit card can hurt your score even more. This is especially true if the card you close is one you’ve had for a long time or one with a high credit limit.
Photo credit: iStock/wichayada suwanachun
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