Does Canceling a Credit Card Hurt Your Credit Score?

Canceling a credit card can influence your credit score. While simplifying accounts or reducing temptation might seem appealing, closing a credit card is not always straightforward. The impact on your credit health is nuanced, depending on factors unique to your credit profile. Understanding these complexities is important for making informed financial choices.

How Cancelling a Credit Card Affects Credit Score

Closing a credit card primarily affects your credit score through two main mechanisms: credit utilization and the length of your credit history. These factors are key components in widely used credit scoring models like FICO and VantageScore. A change in either can lead to a shift in your overall score.

Credit utilization, the amount of credit used compared to total available credit, is a significant factor, accounting for approximately 30% of your FICO Score and 20-21% of your VantageScore. When you cancel a credit card, your total available credit decreases. If outstanding balances on other cards remain the same, your credit utilization ratio will increase. For example, closing one of two $5,000 limit cards with $1,000 balances each would increase utilization from 20% ($2,000/$10,000) to 40% ($2,000/$5,000), negatively impacting your score. Lenders prefer a credit utilization ratio of 30% or less.

The length of your credit history is another consideration, making up about 15% of your FICO Score and around 20-21% of your VantageScore. This factor considers how long your credit accounts have been open, including the age of your oldest and newest accounts, and the average age of all accounts. Closing an older credit card can shorten the average age of your accounts, which is less favorable to credit scoring models. A longer track record of responsible credit management is viewed positively, indicating a more reliable borrower.

Factors Influencing the Impact of Cancellation

The degree to which canceling a credit card affects your credit score is not uniform; it depends on specific characteristics of the card being closed and your broader credit profile. Understanding these variables helps anticipate potential repercussions.

The age of the card plays a substantial role. Closing a credit card held for many years has a more pronounced effect on the average age of your accounts than closing a newer one. For instance, closing your oldest account, open for 15 years, significantly reduces your overall average account age, while closing a new account has minimal impact. Credit scoring models value a long history of responsible credit use, so removing an aged account can diminish this aspect of your profile.

The credit limit of the card being canceled also influences the impact, particularly on your credit utilization ratio. A card with a high credit limit, if closed, substantially reduces your total available credit. This reduction can significantly increase your credit utilization ratio, especially if you carry balances on other credit cards. Conversely, canceling a card with a low credit limit might have a less dramatic effect on your overall utilization, assuming you have other cards with ample available credit.

Your overall credit profile further determines the severity of the impact. If you have numerous other credit accounts with high limits and low balances, closing one card may have a limited effect on your credit utilization. However, if the card you are closing represents a significant portion of your total available credit or if you have limited other accounts, the impact could be more noticeable. Individuals with a strong and diverse credit history might experience less disruption.

Steps to Take Before Cancelling a Credit Card

Before deciding to cancel a credit card, taking proactive steps can help mitigate potential negative impacts on your credit score. These actions focus on managing existing credit effectively and exploring alternatives to outright closure.

A primary step is to pay off any outstanding balances on the credit card you intend to cancel. Most issuers require a zero balance before closing an account. Paying down balances on your other credit cards is also beneficial, as it helps lower your overall credit utilization ratio. This strategy ensures that when available credit from the canceled card is removed, your remaining utilization ratio stays low, minimizing adverse score effects.

Another advisable action is to ensure your other credit lines are sufficiently high and minimally utilized. Maintaining low balances on other credit cards can help absorb the loss of available credit from the closed card. This helps preserve a favorable credit utilization ratio across your remaining accounts. Monitoring your credit report after cancellation can confirm the account status.

Considering alternatives to cancellation can often be a more strategic approach. One option is a product change, where you switch your current card to a different one offered by the same issuer, often to a no-annual-fee version. This allows you to maintain your length of credit history and credit line without incurring unwanted fees. Another alternative, especially if managing high-interest debt, is a balance transfer to a card with a lower interest rate. This can consolidate debt and potentially save money on interest, without closing an established account.