When navigating the complex world of personal finance, even seemingly minor decisions like closing a credit card can impact your credit profile. Closing a credit card can hurt your credit score, and understanding why can help you to make more informed financial decisions.
Why does closing a credit card hurt your credit sometimes? Closing a credit card can increase your credit utilization ratio, which is the amount of credit you’re using compared to your total available credit. It can also leave you with a lower average age of credit and fewer types of credit accounts. This can lead to a dip in your credit score.
There are alternatives to closing a credit card that can help you avoid any negative impact on your credit, which we’ll discuss below.
Impact of closing a credit card on credit score
While there’s truth to the idea that closing a credit account can lower your score, the magnitude of the effect depends on various factors, such as how many other credit accounts you have and how old those accounts are.
Sometimes the impact is minimal and your score drops just a few points. Paying off all your credit card balances in full (not just the card you’re canceling) before closing your account can help you avoid a dip in your score.
The potential drop in credit score should not discourage you from ever closing a credit card; instead, it emphasizes the importance of being strategic with your choices. When you understand the relationship between a card closure and your credit score, you are empowered to make informed decisions that align with your financial goals.
Factors to consider before closing a credit card
Before deciding to close a credit card account, there are a few crucial factors to consider.
Impact on credit utilization
Your credit utilization ratio — the amount of credit you’re using compared to your total credit limit across all credit lines — plays a significant role in your credit score. According to myFICO, your “amounts owed,” a metric that includes your credit utilization ratio, account for 30% of your FICO credit score. You should try to keep your credit utilization ratio below 30%.
If you carry balances on any of your cards, closing a credit card could increase your utilization ratio because your overall available credit will be reduced. This might negatively impact your credit score.
Impact on credit mix
The variety of credit accounts you have accounts for 10% of your FICO credit score calculation. Therefore, closing a credit card can hurt your score, though you may not see a major change. If, for example, the card you’re considering closing is one of only two accounts you have open, it could have a more pronounced impact than if you have a dozen open accounts.
Impact on length of credit history
Your credit history length accounts for 15% of your FICO score. The older the account, the more positively it can contribute to your credit history’s length and credit score. Closing an older card could negatively affect your credit score because it’ll shorten the average age of your accounts. A closed account can stay on your credit report for up to 10 years, so you may not see an effect right away.
Loss of benefits
Examine any rewards or benefits tied to the card you’re considering closing, as canceling it could mean forfeiting those perks. While closing a card with an annual fee might alleviate this extra expense, be sure to compare the card’s costs to the value of its benefits to decide if it’s worth keeping open.
Alternatives to closing a credit card
If you’re thinking of closing a credit card but want to avoid the potentially negative impacts on your credit score, there are alternative actions you can take.
Downgrade to a no-fee card
If the annual fee is why you want to close a card, check if downgrading to a no-fee card is an option. Some credit card issuers will allow you to switch to a no-fee card within their portfolios. By product switching, you can keep the credit history associated with the card while avoiding an annual fee. Just make sure you understand the terms of the new card to ensure it aligns with your financial needs and goals.
Keep the card active
Even if you don’t use a specific credit card frequently, it may still make sense to keep it active and open to maintain your credit history. By making a small purchase on the card every few months and promptly paying it off, you’ll be able to keep the account active. Plus, demonstrating responsible credit usage will likely positively impact your credit score.
How long does a closed credit card account stay on your credit report?
When you close a credit card account, it doesn’t just disappear from your credit profile overnight. In general, closed credit card accounts remain on your credit report for up to seven or 10 years, depending on the account closure details.
If the closed credit account was in good standing (there were no late payments), it will stay on your report for up to 10 years. That’s good news because the positive credit history will help your score even after the account is closed.
If there was a history of late or missed payments, or your account was closed in Chapter 7 or Chapter 13 bankruptcy, your account will stay on your credit report for up to seven years. This goes for accounts turned over to collections, too.
How to close a credit card account
The decision to close a credit card isn’t something to rush into — you need to plan carefully. Here are a few steps to follow to ensure your account closure goes smoothly:
Assess the reasons for closure
You could want to close your card to avoid annual fees, cut out unused credit or simplify your finances. All of these are justifiable reasons to close an account, but you’ll want to explore any other options you might have since closing a card can impact your credit score.
Pay off the balance
If you decide that closing the card is best for you, you’ll want to pay off any balance you’re carrying in full. This ensures you aren’t carrying any debt into the closure process, which can negatively impact your credit score. Plus, paying off your balance will prevent the hassle of lingering payments after the card’s closure.
Contact the card issuer
To officially close your card, contact your card issuer directly. You can call the number on the back of your card, or you may be able to use an online chat. Tell them you want to close the card, and they’ll guide you through the process. Some issuers might try to retain your business by offering alternatives to closure.
One option might be to switch to a no-fee card. This is worth considering because you’ll be able to preserve your credit history. Retention offers are sometimes available too. For example, the issuer might offer you bonus rewards or a statement credit if you meet a certain spending threshold. This could make sense if the bonus you earn outweighs the cost of keeping the card open.
How to minimize the negative effects of closing a credit card
To minimize any adverse effects closing a card can have on your credit score, consider only closing cards that you’ve had for a shorter period or that have lower credit limits. Canceling an older card or one with a high credit limit can have a more noticeable effect on your score.
Paying down any debt on a card before closing it is also important. Leaving unpaid balances behind can negatively impact your credit utilization ratio and potentially lower your credit score. By paying off any outstanding balances, you’ll ensure your credit utilization ratio remains in check and minimize the effects on your credit score.
When closing a credit card might be necessary
While credit cards can be valuable financial tools, there are circ*mstances when closing a credit card might be necessary.
Simplifying finances
Having multiple credit cards can sometimes complicate your finances. If you find it challenging to keep track of payments, due dates and rewards balances on multiple accounts, closing an account might streamline things. However, you can also consider a budgeting or rewards-tracking app, such as Mint or Travel Freely, as it might help.
High fees
If you’re paying a high annual fee for a card and cannot take advantage of the card’s benefits, it might be a good idea to close it. When the expense outweighs the perks of a card, the card is undoubtedly less beneficial.
Separation or divorce
Closing joint credit card accounts during a separation or divorce can provide a sense of financial clarity and protection for both parties involved. Maintaining a shared credit card account might lead to complications. By closing joint accounts, both parties can manage their financial obligations separately, reducing the risk of one person’s actions negatively affecting the other’s credit standing.
Debt reduction
If you’re working to pay down debt and want to minimize the temptation to overspend, canceling a credit card could be a part of your strategy. Closing the account can help you better manage your existing debts and reduce the risk of adding more debt in the future.
Frequently asked questions (FAQs)
Closing a credit card could lower your credit score. That’s because it could lead to a higher credit utilization ratio, reduce the average age of your accounts and hurt your credit mix. Before closing a credit card, it’s wise to consider these factors and the potential impact on your credit score.
The impact closing a credit card can have on your credit score depends on multiple factors. It could decrease your score if it increases your credit utilization ratio or if the closed card has a long credit history. That said, your credit history and overall credit profile can influence the extent of the impact closing a card will have on your score.
Closing a credit card will not instantly remove it from your credit report. The closed account’s details, including its payment history and credit limit, will show on your credit report for up to seven or 10 years.
It depends. Closing an account that’s been open for a long time will affect your average account age the most. Closing a reasonably new account will have the least effect. Because the average age of your accounts is a factor in your credit score calculation, keeping older accounts open will positively impact your score over time. Since a closed account can stay on your credit report for up to 10 years, you may not see an immediate effect.
If you want to close a credit card account, first weigh the potential impacts on your credit score. Evaluate any alternatives, such as switching to a no-fee card or keeping the card active to maintain your credit history. Finally, if you decide to continue with the closure, pay off any outstanding balance, contact the card issuer and follow its procedure.
