Does Closing A Credit Card Hurt Your Credit?

In theory, closing your credit card might seem like a good idea. Maybe you have too many cards and want to cancel one, or maybe you’re trying to improve your spending habits by closing your card altogether. Before doing this, though, it’s wise to consider how closing a card will affect your credit score.

Let’s take a look at why and how closing a credit card can hurt your credit. Then, we’ll delve into when it’s best to keep or close an account.

Closing a credit card can hurt your credit score because of how it affects your credit score factors. According to the Fair Isaac Corporation, responsible for the industry-standard FICO® Score, five factors determine credit score: payment history, credit utilization, credit history, new credit and credit mix.

When you close a credit card account, it can have a negative impact on some of these factors. Let’s take a look at how each will be affected, and the percentage of your score that each factor makes up.

• Payment history (35%): If you have a good history of on-time payments on this account, that history will no longer show up once the account is closed. Keeping the account open will help show lenders that you’re a responsible borrower with a long history of making payments on time.
• Credit utilization (30%): When you remove a credit account, you no longer have that amount of credit available to you. When your total available credit, or total credit limit, goes down, your credit utilization rate may go up.
• Credit utilization rate, also known as credit utilization ratio, is the amount of credit you’re using divided by your credit limit. The lower your credit limit, the harder it may be to keep your credit utilization low – especially under the recommended 30%.
• Credit history (15%): When it comes to the length of your credit history, or age of credit, the average age of all your accounts is the one that matters. When you close credit cards and other loans and they no longer appear on your credit report, these accounts are no longer included in your credit history calculation – making it especially harmful to your score if you close your oldest account.
• New credit (10%): This refers to any recent debts or loan applications added to your credit report, such as opening a new credit card account. Card issuers will conduct a hard inquiry when you apply for a new account, which can negatively impact your credit score. If you open a new account soon after closing another, it could further affect your score.
• Credit mix (10%): When reviewing your credit history, credit card companies and lenders like to see a mix of credit. It shows that you’re capable of handling different types of debt. A good credit mix will have some revolving credit and some installment credit, like a mortgage or personal loan.

Closing any account can mess with your credit mix, which can be especially detrimental to your credit profile if you don’t have many accounts and the one you closed is the only one like it in your mix.

A credit score is almost like a financial report card that tells lenders how well you can handle credit. It helps them determine whether to lend you money, how much to lend and with what terms.

Before you close a credit card account, you should consider how much of an impact canceling your card could have on your credit score, especially if you’re thinking of applying for a new loan.

Let’s say you have four credit cards, with balances on each one.

• Credit Card #1: $5,000 credit limit with a balance of $1,000
• Credit Card #2: $10,000 credit limit with a balance of $1,000
• Credit Card #3: $2,500 credit limit with a balance of $2,000
• Credit Card #4: $8,500 credit limit with a balance of $3,500

Your total credit limit from all four cards is $26,000. The total amount of credit you’re using is $7,500. To get your rate, you divide $7,500 by $26,000, which equals about 29% – that’s considered good.

If you pay off Credit Card #1 and keep the account open, your total credit limit would stay the same ($26,000) and the total amount of credit you’re using would drop to $6,500. Thus, your new credit utilization rate would be 25%.

However, if you pay off the card and then close the account, you would lose the $5,000 credit limit that goes with it. That means, your new total credit limit would be $21,000. Now, with the account closed, your new utilization rate would be about 31%, which is considered average.

By closing the account, you’ll have a higher rate than you had before you paid off your $1,000 credit card balance.

While it’s recommended you keep your accounts open if possible, here are some reasons you might want to close them:

• You’re going through a divorce and your soon-to-be ex-spouse is a cardholder on the account.
• You can’t control your spending and you keep racking up credit card debt.
• The credit card has high annual fees that outweigh its benefits.
• The credit card has an extremely high interest rate.
• It’s a relatively new card and has a low credit limit, so closing it won’t impact your credit history or utilization much.

Along with the already mentioned reasons to pause and carefully consider the implications before closing a credit card, here are some specific situations where you’re better off keeping a credit card account open:

• The credit card account is the oldest on your credit report.
• You have few or no other open credit accounts in your report.
• You don’t use the card very often. (While this may seem like a good reason to cancel the account, it’s actually a good reason to keep it open so you can begin building credit.)

If you believe closing your credit card account is the best move for you, it’s important to take certain steps to ensure the cancellation goes smoothly. Let’s go through those steps now:

• Pay off any outstanding balances. If you have an outstanding credit card balance, you should reach out to your card issuer to develop a plan for paying it off. If possible, you should pay off the entire balance before canceling your card.
• Redeem any rewards. If you have a rewards card, you don’t have to let those go to waste. Redeem any rewards you have left before closing the account.
• Reach out to customer service. Once your balance is paid off and your rewards redeemed, contact customer service and ask to close the account. Make sure to request a written confirmation of your cancellation.
• Write a cancellation letter. You should follow up your cancellation confirmation with a short letter to further confirm the account’s closing. Include your name, address, account number and any other important details, and keep a copy for your records. Reach out again if you haven’t received a cancellation confirmation from your credit card company within a month.
• Update any auto payments. If the card you’re canceling is connected to any auto payments you have set up, make sure to update that payment information so those payments don’t bounce.
• Inform all authorized cardholders. If you have other authorized users on your card, such as family members, notify them that you’re closing the account.
• Destroy your card. Once you’ve completed the other steps, it’s time to destroy your card for good. You can do this by shredding it or cutting it up, as long as it’s in enough pieces that identity thieves couldn’t steal any information from it.

Since closing your card will inevitably hurt your credit score, it’s best to follow up by taking steps to improve your credit.

If you want to keep the account open and get the most out of it, consider these alternatives:

• Call your card issuer and ask to change the card to one that better suits your goals and is from the same issuer.
• Contact your card issuer and ask for a lower interest rate or to waive the card’s annual fee.
• Control your spending habits by hiding your card away, or talk with your card issuer about pausing your account.
• If you’re not using a card enough, start using it for occasional bills or purchases.

An open credit card account can do a lot of good for your credit score, but closing a card can negatively affect your score. Consider your options before canceling a credit card and follow the correct steps to avoid any issues with closing it if you decide to move forward.

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