Does Closing a Credit Card Hurt your Credit: Closing a credit card might seem like a simple financial decision, but it can have a significant impact on your credit score. Many people close credit cards to reduce debt, simplify finances, or avoid high annual fees. However, canceling a card can sometimes do more harm than good, depending on your credit situation.
Understanding how credit scores work and how closing an account affects your financial profile is essential to making an informed decision.
In this article, we’ll break down how closing a credit card can impact your credit, when it might be a good or bad idea, and the best ways to minimize any potential damage.
Understanding Credit Scores
Before diving into the impact of closing a credit card, let’s first understand what makes up a credit score.
The Five Main Factors That Affect Your Credit Score:
- Payment History (35%) – Whether you make your payments on time.
- Credit Utilization (30%) – The percentage of your available credit you’re using.
- Length of Credit History (15%) – How long your credit accounts have been open.
- Credit Mix (10%) – The variety of credit accounts you have (e.g., credit cards, loans).
- New Credit Inquiries (10%) – The number of recent applications for credit.
Since credit utilization and credit history length together make up 45% of your score, closing a credit card can directly affect these categories.
How Closing a Credit Card Affects Your Credit Score
1. Credit Utilization Ratio
Credit utilization is the percentage of your available credit that you’re using. If you have multiple credit cards and close one, your total available credit decreases, increasing your utilization ratio. A higher utilization rate can lower your credit score.
For example:
- You have three credit cards with a total limit of $10,000.
- You have a balance of $3,000 across these cards (30% utilization).
- If you close a card with a $3,000 limit, your total credit drops to $7,000.
- Your utilization rate jumps to 42.8%, which can negatively impact your score.
2. Length of Credit History
The longer your credit history, the better for your score. When you close an older credit card, your average credit history length may decrease, impacting this part of your score.
3. Credit Mix and Account Variety
Lenders like to see a mix of different types of credit (credit cards, loans, mortgages, etc.). If your only revolving credit account is a credit card and you close it, you may see a dip in your score.
Situations Where Closing a Credit Card Might Hurt Your Credit
1. If It Increases Your Credit Utilization Ratio
If you have outstanding balances on other credit cards, closing one will reduce your available credit, making your utilization ratio higher.
2. If It’s Your Oldest Credit Account
The length of your credit history matters. If the card you’re closing is your oldest account, your average credit age will decrease, potentially lowering your score.
3. If It Reduces Your Available Credit Significantly
Closing a high-limit credit card can drastically shrink your total available credit, which may increase your utilization ratio.
When Closing a Credit Card Has Minimal Impact
1. You Have Other Credit Accounts
If you have multiple other credit cards with long histories and good limits, closing one may not have a drastic impact.
2. The Card Has a High Annual Fee But You Don’t Use It
If a card has a high annual fee and you don’t use it often, canceling it might be a smart financial move, even if it slightly impacts your credit score.
3. The Card Has No Balance
If the card has no outstanding balance, closing it won’t cause your utilization ratio to increase.
Steps to Take Before Closing a Credit Card
If you decide to close a credit card, follow these steps to minimize the impact:
- Pay off any remaining balance before closing.
- Transfer automatic payments linked to the card.
- Redeem any rewards or cashback you’ve earned.
- Contact your credit card issuer to notify them.
Alternatives to Closing a Credit Card
Instead of closing the card, consider:
- Downgrading to a no-fee version of the card.
- Keeping it open and using it for occasional small purchases.
- Requesting a credit limit decrease instead of full closure.
FAQs about Does Closing a Credit Card Hurt Your Credit
1. Does closing a credit card impact my credit score?
Yes, closing a credit card can impact your credit score. It may affect factors like your credit utilization ratio and the average age of your credit accounts, both of which are important components of your credit score.
2. What is a credit utilization ratio and why does it matter?
Your credit utilization ratio is the percentage of your available credit that you’re using. It’s recommended to keep this ratio below 30% to avoid negatively affecting your credit score. Closing a card reduces your available credit, which can increase your utilization ratio if you carry balances on other cards.
3. How does the age of my credit accounts affect my credit score?
The length of your credit history accounts for a significant portion of your credit score. Older accounts contribute to a longer credit history. Closing an older account can shorten your average account age, which might lower your credit score.
4. Are there times when it’s better to close a credit card?
Yes, there are situations where closing a credit card might be advisable. For example, if it’s costing you high annual fees or if you find it hard to manage too many accounts. However, consider the potential impact on your credit score before doing so.
5. What are the alternatives to closing a credit card?
Instead of closing a credit card, you could consider other options such as downgrading to a card with no annual fee or using the card for small recurring transactions to keep it active without increasing your debt.
6. How can I close a credit card without hurting my credit score too much?
To minimize the impact on your credit score, try to pay down balances on your other cards first to lower your credit utilization ratio. Also, consider closing newer accounts rather than older ones to preserve the length of your credit history.
7. How long does the impact of closing a credit card last on my credit report?
The impact of closing a credit card can vary, but closed accounts in good standing can stay on your credit report for up to 10 years. This continued presence can help buffer some of the negative effects on your credit score.
8. Should I consult someone before closing a credit card?
It’s often a good idea to consult with a financial advisor or credit counselor to understand the full implications of closing a credit card, especially if you have a large amount of credit or multiple cards.
Conclusion
Closing a credit card can have various effects on your credit score, depending on your overall financial situation. While it can sometimes be necessary, taking steps to minimize negative impacts is crucial. Evaluate your credit utilization, credit history length, and available credit before making a final decision.
