Does Closing a Credit Card Affect Your Credit Score?
If you’re thinking about closing a credit card you haven’t used for years, you might want to reconsider. Closing a credit card can actually lower your credit score by potentially reducing the length of your credit history, especially if you’ve had the account for a long time. It can also affect your credit utilization ratio by reducing the amount of available credit you have access to..
In this post, we’ll go over how closing a credit card can hurt your credit score and how you can decide if closing the account is in your best interest. Let’s break it down further.
In This Piece:
- How Does Closing a Credit Card Hurt Your Credit Score?
- How to Cancel a Credit Card
- FAQ
- Closing a Credit Card FAQ
- Monitor Your Other Lines of Credit
How Does Closing a Credit Card Hurt Your Credit Score?
Your credit score is made up of several factors, and closing a card can change these enough to harm your score. Here’s a breakdown of how credit scores are often calculated:
- Length of credit history (15%)
- Credit utilization rate (30%)
- Credit mix (10%)
- Payment history (35%)
- New inquiries (10%)
Length of Credit History Decreases
Your length of credit history is an average of all of the ages of all of your current—which means open and active—accounts. If you close one of your credit cards, it usually decreases this average age.
Credit Utilization Rate Increases
The amount of revolving credit card limit you are currently using is called your revolving utilization. Let’s say you have a credit card with a $10,000 limit and a $2,000 balance. You are utilizing 20% of your credit line.
To maximize your credit scores, you’ll want your revolving utilization to be as low as possible, with 10% or lower being ideal for most people.
An open credit line with a roomy limit and zero balance will help lower your revolving utilization, especially when you carry balances on other accounts. But closing an empty card takes away some of that open limit. This will raise your credit utilization rate; if the change is enough, it could significantly lower your credit score.
Payment History Decreases
Your payment history makes up 35% of your credit score, and when you close an old credit card, the history of the payments made to that card disappears from your credit report. This can cause your score to drop by several points. While you can boost your score back up, improving your payment history takes time.
By leaving your old credit card open, even if you only use it for small purchases once a month, you’ll preserve that positive payment history, which can help you improve a lower credit score and maintain a good credit score.
Credit Mix and New Inquiries Changes
In general, the better your credit mix, the better your credit score. If you only have one revolving account and you close that card, you’ve changed your credit mix considerably. This can hurt your score.
It’s also common for people to close a credit card only to find that they need one or want another one down the line. This means you’ll have to open up a new card, which will trigger a hard credit inquiry. That hard inquiry can cause your score to drop by as much as 10 points.
How to Cancel a Credit Card
Once you decide that the hit to your credit scores is worth it—let’s say you have a joint credit card account with your spouse, but you’re divorcing—there are a few steps you’ll want to take to close your old card:
- Pay off the balance. Before you close the card, you’ll need to pay off what you owe on the card. If you can, pay it off in one lump sum. This will help you close the account faster. If you can’t afford to pay off everything you’ve charged, pay down what you can as fast as possible until you repay the card in full.
- Confirm the balance. Contact the credit card issuer and make sure that there are no pending transactions that could cause the card to stay open. They’ll be able to review everything on the account and ensure that the balance is at $0.
- Notify your credit card issuer that you want to close the account. Let your credit card issuer know that you want to close the account. You may be able to do this over the phone, but sending an email or physical letter to the issuer is helpful so everything is documented in writing.
- Get confirmation of the closure. Contact the credit card issuer and request confirmation that the account is closed. Try to get the confirmation in writing and keep a copy of the email or letter for your records.
The exact process you’ll need to follow to cancel your credit card may vary depending on your credit card issuer. Contact their customer service line to learn about the steps you’ll need to take.
Closing a Credit Card FAQ
Is It Better to Cancel Unused Credit Cards or Keep Them?
In most cases, it’s better to just keep the card and not use it instead of canceling it. This assumes you’re not using it and can manage it responsibly. However, you’ll also want to factor in any annual fees the card charges. If you find that the fees are more than it’s worth to keep the card open, you may be able to negotiate with the company instead of canceling the card.
What Happens to Your Credit When You Close a Card?
When you close the card, your credit score might take a hit. How much it goes down depends on which of the credit factors it affected and by how much. Credit reporting agencies will be alerted of any closed accounts within a month, but the positive effects of the account can last for 10 years.
Is It Bad to Have a Lot of Credit Cards With Zero Balance?
It can be bad. Credit card issuers tend to report activity on actively used cards, even if they’re only used every few months or for very small purchases. If you have several cards with zero balances and haven’t used them for years, the credit card issuer may close the account due to inactivity.
They may also stop reporting activity to the credit bureaus. This can effectively shorten the length of your credit history and may cause your credit utilization ratio to increase.
Is It Bad to Cancel a Credit Card?
It’s not necessarily bad to cancel a credit card. If you no longer want a joint credit card with your partner or worry about your ability to monitor transactions, canceling one can be a good choice. But if you can leave your cards open and active, doing so can keep your credit score higher.
Monitor Your Other Lines of Credit
Additionally, you should be responsible for your remaining lines of credit and focus on using them without affecting your credit utilization rate. By keeping those accounts open and using your credit cards at least once a month, you can build your credit or at least negate any potential score decreases that might come from canceling a card.
Keep an eye on your Credit Report Card that lets you know where your credit stands.
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