How Bad Does It Hurt Your Credit to Close a Credit Card?

Closing a credit card account can impact your credit standing. Understanding how this action affects your credit score is important for financial health. Credit scores are dynamic, reflecting financial behavior, and changes to credit card accounts can influence these calculations. The decision to close a credit card should be informed, considering both immediate and long-term implications for your credit profile.

Understanding Credit Score Factors

Closing a credit card can impact several elements of your credit score: your credit utilization ratio, the length of your credit history, and your credit mix. These factors are foundational to how creditworthiness is assessed. Each plays a distinct role, and a change in one can affect your overall score.

Credit Utilization Ratio

The credit utilization ratio, a significant component of credit scoring models, represents the amount of revolving credit you use compared to your total available revolving credit. This ratio is expressed as a percentage. To calculate it, sum the outstanding balances across all your credit cards, then divide that total by the sum of all your credit limits. For instance, if you have $1,000 in balances and $10,000 in total credit limits, your utilization is 10%. Experts advise keeping this ratio below 30%.

Closing a credit card decreases your total available credit, which can cause your credit utilization ratio to rise if you carry balances on other cards. For example, if you had $5,000 in balances and $20,000 in total credit, your utilization was 25%. If you close a card with a $5,000 limit and no balance, your total available credit drops to $15,000, and your utilization increases to 33.33% ($5,000/$15,000), potentially impacting your score. This effect is pronounced if you have high balances on remaining cards or if the closed card had a substantial credit limit.

Length of Credit History

The length of your credit history, including the average age of your accounts, influences your credit score. A longer credit history indicates more experience managing credit, which lenders view favorably. Closing a credit card, especially an older one, can reduce the average age of your active credit accounts. While closed accounts with a positive payment history remain on your credit report for up to 10 years, they no longer contribute to the average age of your active accounts. The impact is more significant if the closed card was your oldest account or if you have a relatively short credit history overall.

Credit Mix

Credit mix refers to the variety of credit types you manage, such as revolving accounts (credit cards) and installment loans (mortgages or car loans). Lenders consider a diverse credit mix a sign of financial responsibility. Closing a credit card, especially if it is one of your few revolving accounts, could alter your credit mix. However, this factor has a less significant impact on your credit score compared to credit utilization or the length of your credit history. If you have multiple credit cards and other loans, closing one card might not significantly affect this aspect of your score.

Considering Card Closure

Deciding whether to close a credit card involves weighing personal and financial considerations against the potential impact on your credit score. While closing a card might appear beneficial, understand the broader implications before taking action.

High Annual Fees

A common reason to close a credit card is high annual fees. If the card’s benefits or rewards do not outweigh the annual fee, closure might seem logical. However, before canceling, contact the card issuer to explore alternatives. These include negotiating for a lower fee, inquiring about a product change to a no-annual-fee card, or requesting a credit limit increase on another open card to offset the reduction in available credit.

Temptation to Overspend

Another motivator for closing a card is the temptation to overspend. For those accumulating debt or struggling with impulsive purchases, removing access to credit can feel necessary. Alternatives to outright closure exist that help manage spending habits without negatively impacting your credit score. These include freezing the card through your issuer’s mobile app or online portal, which temporarily blocks new transactions but keeps the account open. Other strategies involve physically securing the card, setting spending alerts, or unlinking card information from online shopping sites to add friction to impulse buys.

Unused Cards or Too Many Accounts

Individuals might consider closing unused credit cards or when they feel they have too many accounts. While an unused card might seem like a liability, keeping it open can be beneficial for your credit utilization ratio by contributing to your total available credit. If the card has no annual fee, maintaining it can help sustain a longer credit history. To keep an unused card active and prevent the issuer from closing it due to inactivity, make a small, occasional purchase and pay it off immediately. If concerned about managing too many accounts, focusing on responsible use of existing cards often serves credit health better than closing them.

Poor Customer Service or Suboptimal Rewards

Poor customer service or suboptimal rewards programs can prompt a desire to close an account. While these are valid personal reasons, the decision should be made with awareness of potential credit score impacts. Prioritize your financial goals and understand the trade-offs between personal convenience and credit score implications.

Actions After Closing a Card

Once a credit card account has been closed, several steps can help manage the transition and monitor your credit health. These actions aim to confirm the closure, ensure accuracy in your credit reports, and understand any subsequent score fluctuations.

Confirmation and Payments

Confirm the account closure directly with the credit card issuer and obtain written confirmation. This documentation can be valuable if discrepancies arise later regarding the account’s status. While you might not be charged a fee for closing an account, any outstanding balance must still be paid off, and interest will continue to accrue until the balance is zero. Ensure all recurring payments or subscriptions linked to the closed card are updated to another payment method to avoid service interruptions or missed payments.

Monitoring Credit Reports

Monitor your credit reports from the three major nationwide credit bureaus—Equifax, Experian, and TransUnion—after closing an account. Federal law grants you a free copy of your credit report from each bureau once every 12 months, accessible through AnnualCreditReport.com. The bureaus have also permanently extended a program allowing weekly free access to these reports. Checking these reports ensures the account is accurately reported as closed and helps identify any unexpected activity or errors.

Understanding Score Fluctuations

Your credit score may experience some short-term fluctuations after a card closure. The long-term impact depends on various factors, including your overall credit profile, the specific credit card closed (e.g., its age, credit limit, and balance), and how you manage your remaining credit accounts. While closed accounts in good standing remain on your credit report for up to 10 years, negative information, such as late payments, remains for about seven years. Maintaining low balances and consistent on-time payments on your other active accounts can help mitigate negative effects from the closure.