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How Closing a Credit Card Affects Your Credit Score
Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.
Having too many credit cards may lead to paying unnecessary annual fees or a temptation to overspend. And in some cases, having too many credit cards can lead to an identity theft risk.
But how do you go about canceling your unused credit cards without hurting your credit score? The act of closing old accounts requires a delicate dance as closing old accounts can potentially hurt your credit score if you’re not careful.
Here’s what you need to know before you cancel a credit card.
How closing a credit card could hurt your credit score
Your credit history and score reflects your past behavior with credit and loans, demonstrating to future lenders the likelihood that you’ll repay borrowed funds. Closing a card impacts two important components of your credit score: the overall age of your accounts and your credit utilization ratio.
In the past, people who had too many open credit accounts were penalized as they were viewed as being high-risk with so much credit available to them — however, this has changed considerably over the years. As long as a borrower has handled all of their accounts responsibly by keeping balances low and paying on time, lenders (and the credit scoring companies) no longer negatively weigh having multiple credit cards as a bad thing.
However, juggling multiple credit cards can become cumbersome, and if you’re paying an annual fee for a card you rarely use, decluttering your wallet can be a smart move — if done wisely.
How closing a credit card impacts your credit utilization ratio
Your credit utilization ratio is measured by the amount you owe on credit cards divided by your credit limit. Your utilization ratio is measured per card as well as across all your cards. It is the second most important credit scoring factor, making up 30% of your overall FICO credit score (with payment history carrying the most weight).
FICO reports that borrowers with the best credit scores use about 7% of their credit limits, with the average utilization being 4.1 percent for those with top scores of 850. Most experts recommend that you keep your credit utilization ratio well below 30%, but closer to 0% is even better.
When you cancel a credit card, you reduce your available credit. This can drive up your credit utilization ratio if you’re carrying balances on any other credit cards — and a higher credit utilization ratio makes you look like a riskier borrower.
Canceling a credit card with a balance has a “doubly” negative effect. When you close a card with a balance, the balance on the credit card will continue to count toward used up credit. However, the credit limit on the card will fall to zero. The result could be a dramatic increase in your credit utilization ratio.
Here’s a quick illustration of how canceling a card could negatively impact your credit utilization.
Say you have three credit cards. If you divide your balance by your credit limit, you can see not only your individual card’s utilization, but your overall utilization across all the cards:
|Card||Balance||Credit limit||Credit utilization ratio|
Now if you choose to close Card A, you can see how that will raise your overall utilization:
|Card||Balance||Credit limit||Credit utilization|
You can do four things to reduce your credit utilization ratio before deciding to close a card:
- Request a credit limit increase on any of the cards you choose to keep.
- Downgrade to another card from the same issuer and move that credit limit to the new card.
- Pay down existing balances on the cards you aren’t closing.
- Apply for a new card before closing the old card.
How closing a credit card impacts the overall age of your credit card accounts
FICO and other credit scoring models consider the length of your credit history when calculating your credit score. The longer you’ve been using credit responsibly, the more creditworthy you are in the eyes of lenders.
The average age of your accounts counts toward 15% of your FICO Score, and it’s calculated by adding together the age of all your accounts by the number of accounts. For example:
Card A is 5 years old, Card B is 10 years old and Card C is 2 years old. That comes to an average of (5 + 10 + 2) = 17 divided by 3 = 5.7 years.
The good news is that closed accounts in good standing stay on your credit reports for 10 years, so your length of credit history won’t be negatively affected for a decade unless you decide to open a new credit card account (which will then reduce your average age of accounts).
When will closing a credit card cause minimal damage?
How long you’ve been using credit and how much debt you’re carrying will determine any negative impact of closing a credit card.
People who have tons of available credit and little debt may find that their credit score only drops a few points after closing a credit card account. However, someone who has only a couple years’ experience with credit cards and who may be carrying a lot of debt on those cards may see a much bigger impact.
Consider someone who has a $70,000 credit limit spread across five credit cards. If that person has an average balance of $10,000, they have an overall credit utilization ratio of 14%. Closing a credit card with a $10,000 limit will only increase their utilization ratio to 17%. Such a small increase in credit utilization will have a minimal effect on their credit score.
Conversely, if a person has two credit cards with a combined credit limit of $5,000 and an average balance of $1,500 across both cards, their overall utilization rate is 25%. But if one card with a $1,000 limit is closed, but the same balance remains, that utilization rate will climb to 38%.
Should you keep old credit cards open?
Keeping old credit cards open and active will help preserve your credit score, but holding onto old cards isn’t always the right choice: For example, you may decide to shut down a credit card that carries a high annual fee.
However, to avoid the loss of that credit limit, you could ask the credit card company to convert your card to a no-fee card, if available, and ask that the issuer move the old credit limit to the new card.
Too many credit cards may also pose a security risk. If you have a lot of credit accounts that you never use or check on, a thief could steal the account details without your knowledge. Even though you’re generally not liable for unauthorized credit use, you’ll still have to devote some time to report and resolve issues related to identity theft.
Another reason to cancel a credit card is to remove the temptation to overspend and rack up debt.
However, if you choose to avoid credit cards entirely, you risk a severe credit score drop after the closed card account falls off your credit reports in 10 years. Unless you have other loans reporting activity to the credit bureaus, you may risk becoming “credit invisible.” You have to have some type of account reporting to the credit bureaus to generate a credit score.
Before closing your credit card account
Before closing down an old credit card, take these five steps:
1. Request a fee waiver or card conversion
Some credit card companies will waive an annual fee, or convert a card that has a fee to a no-fee account. Before you cancel your credit card, call the lender to see if it will work with you.
2. Redeem or transfer rewards
When you close down a credit card, you may lose accumulated rewards. Before you cancel your card, make sure to redeem those rewards. In some cases, you may be able to transfer your points or miles to an airline or hotel loyalty program. Check the fine print on the credit card rewards program to learn your options.
3. Apply for loans, mortgages or new credit cards
Canceling an old card could drop your credit score and limit your chances of qualifying for a great rate on a loan.
4. Transfer or pay off the balance
You can shut down a credit card with a balance, but that’s not ideal. Try to pay off the card’s balance before shutting it down. If that’s not possible, transfer the balance from a high interest card to a new 0% balance transfer credit card.
5. Consider credit counseling
A non-profit credit counselor or accredited credit repair company can help you design a plan to eliminate credit card debt and live within your budget. Credit counseling could be more helpful than canceling credit cards without a plan.
Carefully consider whether or not your credit score can take a hit. Your credit score is an important factor when you apply for a loan or other financial product. So if you need to close a credit account, be sure to time it so that it doesn’t hurt your chances of a loan or another financial product.