How Much Does Cancelling a Credit Card Hurt Your Credit?

Managing personal finances often involves decisions about credit, including whether to cancel a credit card. Many individuals worry about how this action might influence their credit score, which lenders use to assess risk for loans or new credit. Understanding the potential impacts of closing a credit card account is important for financial health.

Understanding Credit Score Components

Credit scores distill an individual’s financial behavior into a single number. FICO and VantageScore are two widely used models, both considering similar categories from your credit report with different weights.

Payment history is the most influential factor, accounting for approximately 35% of a FICO score and being “extremely influential” for VantageScore. It reflects whether bills are paid on time, with consistent, timely payments being beneficial.

Amounts owed, also known as credit utilization, is another significant component, making up about 30% of a FICO score and being “highly influential” for VantageScore. This ratio compares the total amount of revolving credit against the total available credit. A lower utilization ratio indicates responsible credit management and is favored by lenders.

The length of credit history (age of accounts) accounts for 15% of a FICO score and is “highly influential” for VantageScore. A longer history of responsible credit use contributes positively to a score.

Credit mix, including credit cards, installment loans, and mortgages, makes up about 10% of a FICO score and is “highly influential” for VantageScore. Lenders appreciate seeing a mix of credit types.

New credit, including recent credit applications and newly opened accounts, accounts for the remaining 10% of a FICO score and is considered “less influential” for VantageScore. Numerous recent inquiries or new accounts can signal higher risk to lenders.

How Cancelling a Card Affects Your Credit Score

Cancelling a credit card can influence your credit score through several mechanisms, by affecting your credit utilization and the length of your credit history. When a credit card account is closed, its available credit limit is removed from your total available credit.

If you carry balances on other credit cards, this reduction can increase your credit utilization ratio. For instance, closing a card with a $10,000 limit when you have $5,000 debt on $20,000 total limit (25% utilization) would raise your utilization to 50%. A higher credit utilization ratio can negatively impact your credit score.

Closing an account can also affect the length of your credit history, especially if it is an older card. While closed accounts in good standing can remain on your credit report for up to 10 years, canceling an old card can eventually lower your average age of accounts. A shorter average credit age is viewed less favorably by scoring models. This impact is more pronounced if the closed card was your oldest account.

The diversity of your credit mix could also be affected, though this is a less significant factor than credit utilization or history. If the canceled card represented a unique type of revolving credit, its closure might slightly reduce the variety of your credit accounts. However, for individuals with other active credit lines, the effect on credit mix is minimal. The most common negative impacts stem from changes to available credit and average account age.

Key Factors Determining the Impact’s Severity

The extent to which canceling a credit card impacts your credit score is not uniform; it depends on several individual circumstances, including the age of the account being closed. Closing an older, well-established account can have a more pronounced negative effect on the average age of your credit history compared to closing a newer card. An account that has been open for many years contributes positively to the length of your credit history, and removing it shortens this metric.

The credit limit of the card being canceled also plays a role. Canceling a card with a high credit limit, especially if you carry balances on other cards, can reduce your total available credit. This reduction can lead to an increase in your overall credit utilization ratio, which is a factor in credit scoring. Conversely, closing a card with a low limit may have little to no effect on your credit utilization with ample available credit.

Your overall credit utilization before cancellation is another factor. If your existing credit utilization ratio is already low across your other accounts, the impact of closing a card might be less severe. However, if you are already using a portion of your available credit, removing a card’s limit could push your utilization into a higher, less favorable range, potentially leading to a score drop.

The number of other open credit accounts you possess can also mitigate the impact. If you have many other active credit accounts, the closure of one card might have a smaller relative effect on your overall credit profile. For someone with few accounts, however, closing even one could disproportionately affect their credit mix and available credit.

Steps to Consider Before Cancelling a Card

Before deciding to cancel a credit card, consider several steps to understand and potentially mitigate any negative effects on your credit score. One action is to pay down balances on your other credit cards. Reducing your overall outstanding debt before closing an account helps maintain a low credit utilization ratio, even after the available credit from the canceled card is removed. This step can minimize the potential negative impact on your score.

It is also important to understand the card’s history and its role in your overall credit age. If the card you are considering canceling is your oldest account, or if it contributes to the average age of your credit history, keeping it open might be more beneficial for your score.

You should also check for any remaining rewards or balances associated with the card. Redeem any accumulated points, miles, or cashback before closing the account, as these are forfeited upon cancellation. Ensure the card’s balance is entirely paid off, as most issuers require a zero balance to close an account.

Consider alternatives to outright cancellation, especially if the concern is an annual fee or overspending. Many credit card issuers offer product changes, allowing you to switch to a different card from the same issuer, such as a no-annual-fee version, while preserving your account history. This approach can help maintain your length of credit history and overall available credit.

If overspending is a concern, consider storing the card securely or using it for a small, recurring expense to keep it active without incurring debt. Finally, review your current credit report to understand your credit standing and how the card’s closure might affect your credit profile.