Does Canceling a Credit Card Hurt Your Score?

Many individuals consider canceling a credit card to simplify finances or reduce spending. This often raises questions about its financial impact. Understanding factors involved in closing an account is important for a healthy credit profile. This article explores how canceling a credit card influences your credit score and outlines considerations before taking this step.

Impact on Your Credit Score

Closing a credit card affects your credit score by altering the credit utilization ratio, which compares total credit used to total available credit across revolving accounts. When a card is canceled, overall available credit decreases. This can cause the utilization ratio to rise if balances remain on cards.

For example, if you have $2,000 in debt on cards with a $10,000 total limit (20% utilization), closing a card with a $3,000 limit reduces total available credit to $7,000. Your utilization then jumps to about 29% with the same debt. A higher utilization ratio, especially above 30%, negatively impacts credit scores, signaling increased reliance on credit.

Closing a credit card also influences your credit history length. Scoring models consider the age of your oldest account, newest account, and average age of accounts. Canceling an older credit card can shorten the average age of accounts and your overall credit history. This is a concern as credit history length contributes 15% to FICO scores and 20-21% to VantageScore models.

Closing a credit card can affect your credit mix. This refers to the variety of credit accounts (revolving and installment). While a diverse mix is seen favorably, closing a credit card might alter this mix, especially if it’s one of few revolving accounts. However, credit mix usually accounts for 10% of a FICO score, making it less influential than payment history or credit utilization.

Key Considerations Before Canceling

Before closing a credit card, evaluate factors influencing your financial health. The card’s age is a primary consideration, as older accounts contribute positively to your credit history length. Maintaining long-standing accounts, even if rarely used, helps sustain a favorable average age of accounts. This data provides lenders a longer track record.

The credit limit is important, especially for high-limit accounts. Such cards significantly contribute to your total available credit, and closing them reduces this limit. If you carry balances on other cards, reduced total available credit can inflate your credit utilization ratio, leading to a decline in your credit score. Assessing this impact is key.

Annual fees can be a valid reason to cancel a card if benefits do not outweigh the cost. Many cards charge annual fees. If you are not utilizing the card’s rewards or perks, paying this fee may not be prudent. Weigh the cost against the card’s utility and its impact on your credit score.

Review card usage patterns. If a card is unused or serves no financial purpose, its closure may seem logical. However, if occasionally used for small purchases or as an emergency option, keeping it open can be beneficial for your credit history. Conversely, if the card encourages overspending, closing it is a disciplined financial decision, despite potential credit score implications.

Consider your debt load and existing credit accounts. If you have many active credit lines and a strong, diverse credit history, closing one card can have minimal impact. However, if you have limited credit accounts or are planning a major loan application, such as a mortgage, retaining established credit lines can be more advantageous. Evaluate your credit profile for an informed decision.

Alternatives to Closing an Account

To manage credit cards without negative impact from cancellation, several alternatives exist. One strategy is to downgrade the card to a lower or no annual fee version. Contact the card issuer about product change options. Downgrading allows the account to remain open, preserving your credit history length and credit limit, minimizing impact on your credit score.

Another option is freezing or locking the card, preventing new transactions without closing the account. Many card issuers offer this feature through their mobile apps or online portals. While a credit freeze with reporting agencies restricts access to your credit report for new credit applications, freezing a card directly with the issuer stops spending on that account. This can be an effective tool for controlling spending or deactivating a card.

Maintaining minimal activity on the card is an alternative to closure. Making a small purchase and paying it off immediately keeps the account active, preventing closure due to inactivity. This approach ensures the card contributes positively to your credit history and available credit. Card issuers may close inactive accounts after a period of inactivity.

Steps for Closing a Credit Card

To close a credit card, a process ensures smooth closure. First, pay off the outstanding balance. Most card issuers require a zero balance before an account can be closed; consider any pending transactions. This ensures no lingering debt remains after closure.

Redeem any accumulated rewards or points on the card. Many rewards programs state that points may be forfeited upon account closure. Reviewing the card’s terms regarding rewards redemption before closure prevents benefit loss. Cash-back rewards are often easiest to redeem, as a statement credit.

Before contacting the issuer, update any recurring payments or subscriptions linked to the card. Automatic payments for services like streaming, utilities, or memberships must be switched to an alternative payment method. This prevents service interruptions and missed payments, which could otherwise lead to late fees or negative impacts on other accounts.

Contact the credit card issuer directly to request account closure. This can typically be done by calling the customer service number. Obtain a confirmation number or written confirmation of the account closure for your records. After closure, monitor your credit reports for several months to confirm the account is accurately reported as “closed at customer’s request.”