Does Closing A Credit Card Hurt Your Credit?
Matt Cardwell7-Minute Read
PUBLISHED: August 31, 2023
In theory, closing your credit card might seem like a good idea. Maybe you have too many cards, or you’re trying to improve your spending habits by closing one of your cards. However, before doing this, it’s wise to consider how closing a credit card affects 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.
Why Does Canceling A Credit Card Hurt Your Credit?
Closing a credit card can hurt your credit score due to how it affects the factors that make up your credit score. A credit score is a three-digit number that tells lenders how well you handle repaying debt. It helps them determine whether to lend you money, how much to lend and with what terms.
According to the Fair Isaac Corporation (FICO®), five factors affect credit scores. These factors are payment history, amounts owed, length of history, new credit and credit mix.
How Closing A Credit Card Can Affect Credit Score
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 each factor makes up.
- Payment history (35%): If you have a history of on-time payments on an account, that history won’t show up once you close the account. Lenders won't be able to see your good payment history on the closed account. Keeping the account open can help show lenders that you’re a responsible borrower.
- Amounts owed compared to available limit (30%): When you close a credit account, that amount of credit is no longer available to you. If your total available credit goes down, your credit utilization rate may go Your credit utilization rate or ratio is the amount of credit you use divided by your total credit limit.
A lower credit limit may make it harder to keep your credit utilization under the recommended 30%. To keep a low credit utilization ratio with less available credit, you have to spend less.
- Length of credit history (15%): When it comes to the length of your credit history, the average age of your accounts is what Closed credit accounts no longer appear on your credit report. These accounts are also no longer included when calculating the age of your credit.
This can be especially harmful to your score if you close your oldest account.
- New credit (10%): This refers to any recent debts or loan applications on your credit report, such as opening a new credit card. Card issuers conduct a hard inquiry when you apply for a new account, which can lower your credit score. If you open a new account soon after closing another, it could further damage your score.
- Credit mix (10%): When reviewing your credit history, credit card issuers 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 has both revolving credit (e.g., credit cards) and installment credit (e.g., personal loans).
Closing an account can be especially detrimental to your credit mix if you don’t have many accounts. It can also be harmful if the one you close is the only account of that type in your mix.
How Much Does Closing A Credit Card Hurt Your Credit?
Before you close a credit card, you should consider how much it could impact your credit score. This is especially important if you’re thinking of applying for a new loan.
How severely closing a credit card will affect your credit varies by situation. For example, let’s say you have four credit cards with balances on each one.
Credit Card #1
Credit Card #2
Credit Card #3
Credit Card #4
In this scenario, 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 utilization rate, you divide $7,500 by $26,000, which equals about 29% ($7,500 ∕ $26,000 = 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). The total amount of credit you’re using would drop to $6,500, so your new credit utilization rate would be 25% ($6,500 ∕ $26,000 = 25%).
However, if you pay off Card #1 and then close the account, you’d lose the $5,000 credit limit that goes with it. That means your new total credit limit would be $21,000. Your new utilization rate would be about 31% ($6,500 ∕ $21,000 = 31%), which is higher than the recommended 30%.
Your credit utilization ratio makes up about 30% of your credit score. Consequently, a higher ratio may significantly lower your score.
When Should You Close A Credit Card Account?
Keeping your accounts open, if possible, is recommended. However, in some cases, closing them could make sense, including:
- 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 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 new card with a low credit limit, so closing it won’t heavily impact your credit history or utilization.
When To Keep An Account Open
Here are some specific situations where you may be better off keeping a credit card account open:
- The credit card account is the oldest on your credit report. Closing your oldest account may lower the average age of all your accounts.
- You have few or no other open credit accounts in your report. A healthy credit mix includes credit cards, among other types of accounts.
- 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. Keeping the account open gives you more available credit. Plus, not using credit from that account can help keep your utilization ratio low.
How To Safely Close A Credit Card
If you decide to close a credit card account, here are steps you can take to make sure the process goes smoothly:
- Check your credit report. Three main credit bureaus – Equifax®, ExperianTM and TransUnion® – collect credit data. In some cases, lenders report different information to different bureaus. You can check all three reports to see what information each bureau has on the account you're closing. This tells you what closing that account may wipe from your credit file.
- Pay off any outstanding balances. You should reach out to your card issuer to develop a plan for paying off any outstanding balances you have. If possible, paying off the entire credit card balance before canceling it may be the best move.
- 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. Contact your credit card company’s customer service team 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 confirmation with a short letter to further confirm the account’s closing. Include your name, address, account number and any other important details. Keep a copy for your records, and reach out again if you don’t receive a cancellation confirmation within a month.
- Update any auto payments. If you cancel a card you use for any auto payments, add new payment information to avoid bounced payments.
- Inform all authorized cardholders. If you have other authorized users on your card, 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 shred it or cut it up, as long as it’s in enough pieces that identity thieves couldn’t steal any information from it.
To reduce the harm that closing a card has on your credit score, follow up by taking steps to improve your credit.
Alternatives To Closing An Account
If you want to keep an 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.
- 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.
- 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.
- Explore credit card debt consolidation
Closing A Credit Card FAQs
Still wondering how closing a credit card account will affect your credit? We answered a few common questions about how canceling a credit card can impact credit.
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.
An open credit card account has the potential to do a lot of good for your credit score. On the other hand, closing a card can negatively affect your score. Consider your options before canceling a credit card. If you decide to close a credit card account, follow the correct steps to avoid any issues.
If you want to consolidate your credit card debt, apply online for a personal loan with Rocket Loans℠.
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