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There are a few reasons why you may consider canceling one of your credit cards. Some people close unused cards or upgrade to a new card that has a more attractive rewards program.
Others may tire of paying an annual fee for a credit card that they rarely use and they want to consolidate their outstanding debts.
But, it’s important to consider this step carefully, if you close a credit card it can harm your credit score and this is especially true if you have an account that’s been in good standing for years.
In this article, we will take a closer look at this topic to help you make informed decisions.
Does it Hurt Your Credit to Close a Credit Card?
You may have heard about credit card closures and the potential for damage to your credit score. This is true to a certain extent, but it’s important to understand that this is not a hard and fast rule.
If the credit card account is fully paid off to $0 before the card is canceled you can avoid a detrimental impact on your credit score. In many cases, it’s a better option to simply leave the credit card open if you’re not using it and you’re not in a position to pay off the balance.
If you need to close a joint credit card account as part of a separation or divorce, you may want to consider an immediate account closure. This is also true if your credit card company is charging high annual fees that you want to avoid.
Sometimes it can be to your strategic advantage to take a hit to your credit score to get rid of a credit card account. But, this should be an exception and it’s always a better idea to get the balance down to $0 before you close the account.
How to Estimate the Impact on Your Credit Score
Most credit experts agree that credit card closures should be avoided even if they are not used regularly because there is a potential to lower your credit score.
There are several ways in which closing a credit card can impact your credit score.
1. Check Credit Utilization
The first area where your credit score can be impacted is with your credit utilization ratio. Credit utilization refers to the total amount of your outstanding debt expressed as a percentage of the amount of your total credit.
For example, if you have a credit card with a $10,000 limit and you are carrying a $5,000 balance and you have a second credit card with a $10,000 limit and a $0 balance, you have total debt of $5,000 and total credit of $20,000. This means that your credit utilization ratio is 25%.
Now, were you to close the second credit card account, you would still be carrying a $5,000 balance, but your available credit has dropped to $10,000. This has immediately increased your credit utilization to 50%.
Ideally, you want to keep your credit utilization at as low a percentage as possible, but under 30% is recommended.
If you have a high credit utilization ratio, it doesn’t mean that you are high risk, but banks may take it as an indication that you may be overextended. For this reason, your credit utilization ratio accounts for 30% of your FICO score or 20% of your Vantage score.
This chart created with Experian data shows that those with an average to good credit score have an average credit utilization ratio of the optimum 33%. This ratio drops significantly for those with very good and excellent scores.
At the other end of the scale, the chart shows that those with poor credit scores typically have a very high credit utilization ratio, with an average of 73%. This will be a massive factor in lending decisions for those in this group.
2. The Average Age of Your Accounts
The longer that you’ve had access to credit, the better potential for your credit score.
A long history of managing credit shows potential creditors that you can responsibly handle accounts. Part of your credit score is calculated to factor in the average age of all your credit accounts.
So, you need to look carefully at how long you’ve held the account that you’re considering closing. If you close an account that you’ve held the longest, it will have the most impact on your credit score.
For example, if you have three credit card accounts; you’ve held one for 10 years, one for five years and one for one year. The average age of your accounts is 5.33 years. Should you close the oldest account, the average age will drop to just two years. On the other hand, if you close the youngest account, it will only drop to five years.
Vantage considers the age of consumer’s credit to be a larger priority in determining creditworthiness, compared to FICO. It makes up approximately 21% of your VantageScore, but only 15% of your FICO score.
Credit Score Factors Not Impacted by Closing an Account
Fortunately, not every area of your credit score is impacted when you close an account. There are some key factors that will not be affected if you choose to close a credit card. These include:
- Payment History: One of the first things lenders want to know is whether you have responsibly managed past credit accounts. This will help the lender work out your risk level when they extend credit to you. This accounts for a massive 35% of your FICO score and 41% of your VantageScore.
- Credit Mixture: FICO scores are also calculated considering your mixture of credit accounts. Having a balance of credit cards, loans, finance company accounts, and retail accounts could make up to 10% of your score.
- New Credit: Lenders are wary when applicants have opened several credit accounts over a short period. This is particularly weighted if you don’t have a significant credit history. New credit makes up approximately 10% of your FICO credit score or 5% of your VantageScore.
Can You Cancel a Credit Card Without Hurting Your Credit?
It may be possible to cancel a credit card without hurting your credit. Ideally, you will pay off your credit card balances in full each month, as this can save you money in interest charges, but it also protects your credit scores.
If you pay off your balance in full, you can minimize the impact of closing a credit card account. It is still worth considering the average age of your credit accounts, but if all of your credit cards show a $0 balance, you should be able to close an account without damaging your credit score.
How to Close a Credit Card Without Hurting Your Credit
As there are several factors that contribute to your credit score, you will need to carefully consider each to safely close a credit card account without damaging your credit.
Before you take any action, there are several steps you’ll need to take to protect your credit if you choose to close an account.
As we touched on above, your payment history is the top factor to calculate your credit score, so any missed or late payments can create a massive impact on your score.
It is crucial that you ensure that payment hits your account before the bill due date, even if you can only make a minimum payment.
If you have concerns about making on-time payments, you could set up auto-pay on your account for the minimum due and make supplemental payments manually.
The big impact of closing a credit card account comes from the changes in your credit utilization ratio. So, you need to do a little calculating to look at the impact closing an account would have.
Ideally, you want to keep your credit utilization below 30%, so if closing a credit card would bring your ratio above this, you may want to delay until you can pay down credit card balances on your other accounts.
Although this is not the most important factor, it is still worth examining the overall age of the accounts on your credit history.
Check how long you’ve held the account you’re considering closing and see how this would affect your overall average.
A major red flag for many lenders is when an applicant has applied for several new credit accounts over a short period.
Even if you have great credit, a quick succession of applications will raise a red flag. Additionally, each credit card application will trigger a hard credit pull, which can drop your score slightly.
So, applying for four or five new card accounts over a week could create a noticeable drop in your score.
If you’ve gone through all of the above steps and you’re confident that closing the credit card account will not have a significantly detrimental impact on your credit, you could proceed with contacting your card issuer to begin the closure procedure.
According to Experian Data, the average, Americans hold an average of 3.84 credit card:
Is There a Right Time to Close a Credit Card?
Typically, closing a credit card is not a great idea, but there are some situations where it could be in your best interests to cancel your card account.
- You’ve Consolidated After Overspending: If you’re working on improving your finances and have consolidated your credit card debt into a loan, you may not want the temptation of having access to more credit. While this will impact your credit utilization, you can focus on clearing your debts to work towards a healthier financial future.
- Avoid Annual Fees: If you carry a card that you don't use and need to pay an annual fee, you may consider closing it to avoid the annual fee.
- Relationship Break Up: If you’ve been sharing finances with a partner, it is a good idea to close any shared credit card accounts. If you’re a joint cardholder, you will remain liable for any current or future charges on the account. So, if your ex decides to go on a spending spree, it could seriously impact your financial future. Even if you’re going through divorce proceedings, while the divorce decree may assign responsibility for a debt, it could still go against you from a lender’s perspective.
What Else to Consider When Canceling a Credit Card
There are other factors to consider when you’re thinking about canceling a credit card. These include:
- The Annual Fee: If you’re not using the rewards or benefits of a card, there is no point in paying an expensive annual fee. In this scenario, it may be worth closing the account. However, if the card has no annual fee or a low fee that is offset by some recurring benefits, you may want to leave the account open. For example, if the card offers lounge access or other travel perks, this may make it worth keeping the account. You’ll need to assess the perks vs the cost of your card account.
- The Card Costs: Another thing that you will need to consider is the other costs of the card. Does the card have a high interest rate? Do you incur transaction charges or fees? If there are any expenses associated with the card, particularly if you’re not carrying a balance, it may be a good idea to close the account. However, if you clear the balance each month and don’t pay anything for the card, it is a better idea to keep the card.
- You Want to Upgrade: If you are planning on closing your account as you want to upgrade to a more generous or attractive card option, consider asking the issuer to transfer the account over to a new card. This may increase or decrease your score depending on how the issuer handles changing your account.
How to Close a Credit Card
If you’ve decided that closing your credit card is the best option for you, the specific steps to complete this process may vary slightly. However, there are some general, but simple steps that can help you to navigate this procedure.
- Redeem any unused rewards: Most credit card companies will void any rewards on an account that is being closed, or you may have a limited timeframe to redeem your rewards. So, to avoid any issues, it is a good idea to redeem any unused rewards accumulated on your account before you start the closure process.
- Pay off the balance: Ideally, you would pay off all your credit card debts to reduce the balances to $0 across all your accounts. This will reduce the possibility that your credit will be hurt by the account closure. However, at the very least, try to pay down and minimize the balances as much as you can.
- Contact your credit card issuer: You’ll find a contact helpline number on your account paperwork and this tends to be the most efficient way to start the ball rolling on closing your account. This will also allow you to confirm that you have a $0 account balance.
- Follow up with a certified letter: Although your card issuer may say that the account closure can be completed by phone, it is always a good idea to follow up with a certified letter that asks for written confirmation of your $0 balance and that the closed account status is sent to you in the mail.
- Check your credit reports: After 30 days of canceling your account, check your credit reports to ensure that the account closure has been properly reported and the balance is $0. If any information is incorrect, dispute it with the appropriate credit bureau.
When Closing a Credit Card Can Improve My Score
Although in most cases, closing a credit card may cause some damage, there are some circumstances when it may help to improve your score. These include:
- A lower debt risk: Some lenders view a credit limit as a potential debt, regardless of whether it has a zero balance or not. If you have a high credit limit, it could be considered a risk to a new lender, as you could still use the limit at any time. So, canceling your card would reduce your limit and could improve your score.
- Better debt control: In order to cancel your card account, the outstanding balance needs to be cleared. If you already have a payment default on the card record, canceling the account will show that you have settled the debt.
- Potential to decrease debt: If you close one credit card account, it allows you to shift your priorities to your other debts. You can channel available income towards paying down other accounts to decrease your debt, which will help you to improve your credit history and score.
Having lots of credit cards won’t necessarily damage your credit score if you are handling the accounts responsibly.
However, if you are canceling multiple cards, you will need to carefully consider all the factors we’ve discussed above to avoid hurting your credit.
Some credit card issuers allow you to raise an online closure request on their official websites. After you make a request, a bank representative is likely to call you to confirm the request.
We’ve covered this earlier, but essentially credit utilization is your total debt represented as a percentage of your total credit limits. The higher the percentage, the more detrimental the impact on your credit score.