Is it bad to close a credit card?

Are you at a place where you paid your credit card balance in full and feel like you no longer need the card? Or maybe you've transferred the balance to a 0% interest card and want to steer clear of the temptation of using a high-interest card.

If either scenario sounds like you, you might be mulling over the option of canceling your credit card. While it can help simplify your finances and prevent you from racking up a balance, it could negatively impact your credit.

To maintain a solid score, it's a good idea to be clued in on the downsides of closing your credit card. So is it a bad idea to close a credit card? Here, we'll walk you through how doing so can impact your credit.

Key takeaways:

• Canceling your credit card can lower your credit because it impacts your payment history, credit mix, and credit usage.
• It can impact your FICO^® and VantageScore^® differently.
• Before making your decision, figure out when it's a good idea to close your credit card or keep it open.

Why does canceling a credit card hurt your credit?

There are two main consumer credit scoring models, FICO^® and VantageScore^®. While the factors that make up each scoring model varies slightly, the credit score range is the same: from 300 to 850, with 300 being the lowest, and 850 being the highest. The higher the score, the lower risk you are in the eyes of lenders and creditors.

When you close your credit card, it can negatively impact your credit score in two ways: it affects your credit mix and your credit history. Your credit mix makes up 10% of your FICO^® Score. So having one fewer card could potentially impact that part of your score by lowering it.

Plus, canceling your credit card can also impact your credit utilization ratio, which can possibly lower your score. Your credit utilization ratio, or credit usage, is the percentage of your total credit against the total credit that's available to you. The lower the credit usage, the better for your score.

For example, let's say you have a credit card with a $10,000 credit limit and your total credit limit from all your cards combined would be $30,000. And your current balance among all your cards is $5,000. If you closed that card with the $10,000 limit, your credit usage would go from 16.67% to 25%.

How closing a credit card can affect credit score

When you close a credit card, it can impact FICO^® and VantageScore^® credit scores differently. That's because each scoring model treats a closed account with a balance.

To give you a bit of context, FICO^® was started by the Fair Isaac Corporation. The VantageScore® was created as a joint venture between the three major credit reporting bureaus – Experian^®, Equifax^®, and TransUnion.^®.

Here's the good news: Fannie Mae and Freddie Mac now accept VantageScore^® and FICO^® for mortgages. This means that more lenders could be viewing this score as they conduct credit checks. In turn, this particular credit scoring model is a valuable tool if home ownership is on the horizon for you.

However, a small – or large – key credit action could be detrimental to the VantageScore^®. That's because it's calculated differently than FICO^®. For example, a hard inquiry can cause a temporary dip in your score by a few points.

How does closing a credit card impact your VantageScore^®?

So how exactly does closing a credit card impact your individual's credit mix, particularly with the VantageScore^®? Your "depth of credit" or credit mix makes up 21% of a VantageScore^® credit score.

So when you cancel a credit card, you can distort the credit mix by removing a type of valuable credit (aka revolving credit) that gives your creditworthiness a boost.

Lenders and creditors like to see a variety of credit types. Why's that? It shows that you have a solid payment history and in turn, can be entrusted with different types of credit by multiple lenders. And, to boot, that you can handle various types of credit over a period of time.

Another downside of canceling your credit score is that it can also drop a potentially positive credit behavior from your credit report and credit score. That's because on-time payments for the card will no longer be reported by the lender. VantageScore^® places a large emphasis on payment history, and it makes up 40% of one's score.

So what about credit utilization? This makes up 20% of your VantageScore^®. As mentioned, when you cancel a credit card, it could hurt your credit. That's because the line of credit that's extended from the card is now removed from your total available credit. So if your other loan or credit account balances are high, your credit utilization ratio might not get ramped up, too.

One last thing: VantageScore^® also factors in available credit when folding in your score. Available credit accounts for 3%. When you cancel a credit card, it removes your card and available credit from your credit report. This brings down the amount of available credit, which can equate to dinging your credit.

How does closing a credit card impact FICO^® Scores?

Now, let's take a look at how closing a credit card can impact your FICO^® Score. While the VantageScore® is now accepted by Fannie Mae and Freddie Mac for home loans, the FICO^® Score is more widely used, by 90% of lenders across the board.

Similar to the VantageScore®, payment history accounts for the largest percentage of a FICO^® score – 35%, to be exact. So closing a credit card can remove a potentially positive credit action from being factored into your score. In turn, lenders will no longer report on-time payments for your card.

What about a credit mix on a FICO^® Score? This makes up 10% of your score, and lenders do prefer to see a variety of credit types when approving loans.

When should you close a credit card account?

Because closing a credit card can damage your creditworthiness, canceling a credit card is only ideal in certain situations.

These include:

• You're in the middle of a divorce or separation, and your spouse is the main account holder.
• You're having a hard time with your spending habits and have racked up a lot of debt on your card. Closing the card can help you get out of credit card debt.
• The annual fee doesn't make the card benefits worthwhile.
• The interest rate on the card is extremely high, and you plan to transfer the balance to another card.
• It's a new credit card with a low credit limit, which means this could have a more minimal impact on your credit utilization.
  

When to keep a credit card account open

So when should you keep a credit card active? Let's take a peek at some of the main reasons:

• It's the oldest account in your credit history. Closing the card account would negatively impact credit history and result in a potentially lower credit score.
• You have a few credit accounts. When you close a card, and it's the only line of your revolving debt, it diminishes your available credit and has a greater impact than if you have multiple credit cards.
• Or let's say you only have a credit card and a car loan. In that case, the different factors that are used to determine your credit score could get hit – think your credit history, credit utilization, and payment history.
  You rarely use the card. If the credit card has a low balance – or even no balance – and is rarely used, then canceling it could do more credit harm than good.

How to safely close a credit card

If you've landed over the decision to close a credit card account, it's a good idea to review your credit report and your score. You can request your credit report by visiting www.annualcreditreport.com. You're entitled to a free report weekly from each of the three bureaus.

While the credit report doesn't typically include credit scores, you can get your credit score for an additional fee. You might also be able to get a credit score from a credit card issuer, credit monitoring service, or money management app.

Ready to close your credit card? Time to roll up your sleeves and do the following–for a smooth process:

• Pay off the balance. Ideally, you'll want to pay off your balance in full before canceling the card. Otherwise, you'll need to continue making payments on a card that doesn't benefit your score.
• Redeem available rewards. Don’t let those points go to waste. Be sure to use all the earned points before canceling. Use all the earned points before canceling. Some credit card rewards programs let you transfer your rewards to someone else or between accounts–you'll need to read the terms, rules and restrictions.
• Contact customer service to request cancellation. You'll also need to send a written request.
•  Write a cancellation letter. When you request a cancellation, it should include your name, address, contact information and the account number. Be sure to retain a copy for your records. Reach out to customer service if the request hasn’t been honored after a month's time.
• Cancel autopay. You'll want to double-check your bank or credit card auto payment settings. Be sure to cancel them to ensure payments aren’t withdrawn after the card balance is paid in full–and the card is canceled.
• Update other cardholders, including authorized users, that the card is canceled and no longer active.
• Destroy all physical cards. Be sure to shred them thoroughly and that no critical information is recognizable before you dispose of your cards.

Alternatives to closing a credit card account

If you're concerned about how closing a credit card can impact your score, or losing out on valuable card features, canceling a card isn't the only option.

Here are some alternatives:

• Reach out to customer service to see if a different type of credit card is available. For example, if they can offer a card with better rewards, a lower interest rate, or one with no annual fee. You might be able to transfer your balance to a new card.
• Discuss interest rate options with the credit card issuer. Reach out to customer service to open a dialogue. Explain that you've been a cardholder for X amount of time, and if you have a positive payment history, even better. If you're a long-term customer, they might offer a lower interest rate for a promotional period.
• Stow your card away to steer clear of the urge to reach for the plastic and make additional purchases. As it goes, "out of sight, out of mind." Cutting up the physical card can help curb use without needing to cancel the account.
• Talk to the card issuer about the possibility of temporarily pausing the account. See what period of time might be feasible.
• If your card hasn't been used – or is rarely used – make a habit to purchase one small item on the account per month. Or put a single recurring monthly subscription on it.  Just be sure to pay the balance off immediately. This financial habit can help to bump up a credit score.
• Consider the option of credit card debt consolidation. When you roll your existing debts into a new, single loan, you can lower your monthly payments, bump down the interest rate, or both.

FAQ about closing a credit card

Want to learn more about the impact of canceling a credit card? Take a look at our FAQ.

Is closing a credit card bad?

Generally, closing a credit card isn’t recommended. Closing a credit card can negatively affect the factors that make up your credit score. This can lead to a lower credit score. Keeping accounts open can give lenders better visibility into your full credit history.

Can I close a credit card with a balance?

You can close a credit card with a balance. However, you should try to pay off the balance before you close it. You're still responsible for paying your credit card balance even if you cancel the card. Contact your card issuer to figure out a plan for paying off your balance.

Should I cancel my credit card?

While closing a credit card usually isn’t recommended, some exceptions apply. Typically, keeping your account open tends to be better for your credit's health. Canceling a credit card can make sense if, for example, a former spouse's name is on it, or you pay high fees on the card.

The bottom line: Understand the credit impact before you cancel a credit card

Before closing a credit card, it's important to know how this can impact your credit report and score – namely your credit mix, credit utilization and payment history. Plus, you'll want to keep in mind how it can affect your FICO® and VantageScore® differently.

If you're struggling with high card balances and would like an alternative to cancel your card, explore credit card debt consolidation with a personal loan from Rocket Loans^SM. Doing so can help you lower your monthly payments, interest rate, and potentially help you pay off debt quicker.