Does Closing a Credit Card Hurt Your Credit Score?
Some people are worried about closing down a credit card even if they don’t use it for a number of reasons, but fear of harming their credit score is often the biggest obstacle.
The truth is that there is no straightforward answer to this question. The immediate and long-term results to your credit score upon closing a credit card will vary based on many factors.
In most circumstances, the impact on your credit score overall will be positive in the long term, but there may be a negative impact in the short term in some circumstances.
Keep reading to find out what is myth and what is fact when it comes to closing credit cards.
Credit Utilization Ratio & Your Credit Score
Closing a credit card means that the next time your credit score is assessed, you will have less available or open credit in your name and a higher credit utilization ratio, or a higher amount of available credit that you are using.
If you have too much available credit and an exceedingly low credit utilization ratio across multiple cards, closing your credit card will be a good thing for your credit score. The fact that you have a large amount of open credit means that, theoretically, you could take on a large amount of debt at any time.
On the other hand, if you have little available credit and a high credit utilization score, decreasing your available credit will increase your credit utilization score even more. This will, in turn, damage your credit score.
How do you know which camp you fall into? It is recommended that you use less than 30% of your available credit, though some experts suggest that using less than 5% or 10% will be equally harmful.
You can figure out your credit utilization ratio by dividing the total of all your credit card debt by the total available credit across all cards.
For example, if you have 5 credit cards with a limit of $5,000 each, and you owe $1,000 on 3 of them and $500 on 2 of them, your total credit card debt is $4,000 and your total available credit is $25,000, giving you a credit utilization ratio of 16%.
Average Age of Credit Card Accounts
When you close a credit card, especially if it is an old credit card or one that you have had open for a long time, it changes the average age of your credit card accounts. This can negatively impact your credit score, making it look like you have less credit history.
For example, if you have had a card open for 10 years, another card open for 8 years, another open for 5 years, and another open for 1 year, your average age of credit card accounts is 6 years. But if you close the card that you’ve had open for 10 years, your average age of accounts drops to 4.66 years.
Incidentally, this is the same reason why your credit score might drop when you open a new credit card. Not only does that mean a formal inquiry into your credit, which causes your credit score to take a hit, but it also means that your average age of accounts is shortened because it added a brand new account to the formula.
Lessening the Blow
If you close a credit card account that has only been open for a few months or one that has a very low credit limit, you will find that the drop in your credit score will be less than if you were to close an account you’ve had open for years or an account with a high credit limit.
Why You Might Want to Close Your Credit Card
If there is a risk of lowering your credit score, why might someone decide to close their credit card rather than just keep it open? Here are a few reasons why it might be worth it to take the credit score hit and close the card:
- High annual fee: If you have a credit card with a high annual fee and you can manage by using only cards that have no or low annual fees, it might be worth it to your budget to save that money and close the account.
- High interest rate: Similarly, if you tend to carry balances on your credit cards, you have a card that has a very high interest rate, and you can manage with using cards that have lower interest rates, it makes sense to close the credit card.
- Rare use: If you rarely (if ever) use a credit card to the point that you may even forget that you have it or misplace it, it is better to close the account than lose track of the details.
- Too many open cards: If you have a high number of credit cards, it may make sense to simplify your finances and close credit cards you don’t want or need.
- Too much unused debt: If you have multiple credit cards with high credit availability, it may be differently damaging to your credit score.
Why Not Keep the Card Open & Not Use It?
If you are wondering why it might not make sense to simply put a card with high annual fees or interest rates into a drawer and not use it rather than close it if it has a negative impact on your credit score, consider this: Open and unused cards are not well-monitored cards. If your identity is stolen or someone steals the card, you may not find out until serious damage is done.
Benefits of Closing a Credit Card to Your Credit Score
Even after you close a credit card, it can still provide value to your credit score.
For example, if you made timely payments and avoided overdraft while you had it, that information will stay on your credit report for 10 years and be factored into your score. If you missed payments on the card, it will only impact your credit score for 7 years.
Additionally, if your credit score drops when you close a credit card account, it will likely only take a few months for it to get back to where it was. This means that timing is most important when considering closing a credit card rather than if it should be done at all.
For example, if you plan to apply for a loan to buy a car or if you are thinking of signing up for a new credit card (perhaps one with no annual fee or high cash back rewards) in the next few months, hold off on closing the credit card until you’ve completed those purchases.
How to Close a Credit Card
All you have to do to close a credit card is pay off any outstanding balance and close the card online. You will need to call the phone number on the back of the card to ensure that you have no interest payments or other charges remaining and that the account was indeed closed. Then, check in with your credit report in the next few months to make sure that the card is showing as closed and that there are no other issues, such as new charges or missing payments.
After that, all you need to do is destroy all the cards you have for the account and update any bill payments that you have set up to charge to the card automatically, if applicable.
Boost Your Financial Standing With Current
One of the best ways to keep your credit score high is to make regular and timely payments to your credit cards. Current can help you do that with the ability to earn 4.00% APY on the money in your Savings Pods up to $6,000 and getting your paycheck up to two days faster with direct deposit. The more money you have in hand to pay your bills, the better equipped you are to make on-time payments that look great on your credit report.
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More Scoring Myths: Closing Credit Cards. (July 2011). FICO.
What Affects Your Credit Scores? Experian.
Everything You Need to Know About Credit Utilization Ratio. (March 2022). Bankrate.
How Length of Credit History Affects Your Credit Score. (October 2021). NerdWallet.
What Happens to Your Credit Score if You Open a New Credit Card? (December 2021). The Ascent.
The Safe Way to Cancel a Credit Card. (December 2021). Investopedia.
How Long Does a Closed Account Stay on a Credit Report? (January 2021). American Express.
How to Cancel a Credit Card the Smart Way. (September 2021). Credit Karma.
Current is a financial technology company, not a bank. Banking services provided by Choice Financial Group, Member FDIC.
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