How Closing a Credit Card Affects Your Credit

Closing a credit card is a financial decision many individuals consider, often without fully understanding its potential effects. This action can have various implications for an individual’s financial standing, particularly their credit profile. Understanding these effects is important before making a choice to close an account. This article will explain the different ways closing a credit card can impact an individual’s credit and financial access.

Changes to Your Credit Profile

Closing a credit card can influence several components of your credit score, with varying degrees of impact depending on your overall financial situation. One of the most significant factors is the credit utilization ratio, which measures the total credit used against your total available credit. When a credit card account is closed, the total available credit across all your accounts decreases. If balances on other cards remain the same, this reduction in available credit can increase your utilization ratio, potentially lowering your credit score. For example, if you have two cards with a combined limit of $10,000 and use $2,000, your utilization is 20%; closing one card with a $5,000 limit while keeping the $2,000 balance would raise your utilization to 40% on the remaining card.

The length of your credit history also plays a role in credit scoring models, as they consider the average age of all open accounts. Closing an older account, especially one you have held for a long time, can reduce this average, potentially affecting your score. However, closed accounts with positive payment history can remain on your credit report for up to ten years and continue to be factored into score calculations.

Credit mix, which refers to having a variety of credit types such as credit cards and installment loans, also influences credit scores, typically accounting for about 10%. Closing a credit card might slightly alter this mix, particularly if it is your only revolving credit account. While its impact is generally less significant compared to credit utilization or history length, maintaining a diverse portfolio of credit can be beneficial.

Financial Access and Benefits

Closing a credit card account extends beyond its impact on your credit score, affecting practical financial access and benefits. A direct consequence is the loss of access to that specific line of credit, which could be important for unexpected expenses or emergencies.

Another consideration involves any accumulated rewards points, cashback, or travel miles associated with the card. These rewards are typically forfeited upon closure if not redeemed beforehand. While some card issuers may offer a grace period to redeem rewards after an account is closed, it is not guaranteed and varies by issuer and program. Therefore, it is important to check the specific terms and conditions of your rewards program before initiating closure.

Furthermore, closing a credit card means losing access to any card-specific benefits or perks it might have offered. These could include extended warranties on purchases, purchase protection, travel insurance, or rental car insurance. While positive payment history from a closed account can remain on credit reports for many years, no new positive payment history will be built.

Actions Before Closing

Before proceeding with the closure of a credit card, several preparatory actions can help mitigate potential negative effects. It is important to pay off the entire outstanding balance on the card, bringing it to a zero balance. While you are still responsible for any debt even after closure, eliminating the balance ensures no further interest accrues and simplifies the process. Any accumulated rewards points, cashback, or miles should be redeemed prior to closure to avoid forfeiture.

You should also identify and transfer any automatic or recurring payments, such as subscriptions or utility bills, linked to the card to another payment method. This prevents service interruptions or missed payments once the card is inactive. Additionally, it is advisable to confirm there are no pending annual fees or other charges that might be incurred soon. Reviewing your current credit report can also provide a clear picture of your existing credit profile, allowing you to understand how closing the account might interact with your overall credit standing.

Steps to Close a Credit Card

The most common method is to contact the credit card company’s customer service department, typically by phone, using the number found on the back of your card or on your statement. Some issuers may also offer an online option to request account closure through their website. During this call or online interaction, you will need to provide necessary identification information to verify your account.

After requesting closure, it is prudent to ask for written confirmation from the issuer that the account has been closed and that the balance is zero. This documentation serves as a record of your request and the account’s status. While the account status update may take approximately one month, it is advisable to monitor your credit report a few weeks or months after closure to ensure the account is accurately reported as “closed by grantor” or “closed by consumer” with a zero balance.