What Happens to Your Credit When You Cancel a Credit Card?

Credit cards are a common financial tool, and managing them responsibly is important for an individual’s financial standing. A credit score, often a FICO Score, represents a person’s creditworthiness, influencing access to loans, interest rates, and other financial products. Understanding how credit actions, such as canceling a credit card, can affect this score is a key aspect of informed financial management.

Understanding Credit Score Components

A credit score is derived from credit data found in a credit report. This score helps lenders assess the likelihood of a borrower repaying their debts on time. FICO Score calculations consider several main categories, each with a different level of importance.

The most significant factor influencing a credit score is payment history, which accounts for approximately 35% of the score. This category evaluates whether past credit accounts have been paid consistently and on time. Following payment history, the amounts owed, also known as credit utilization, constitutes about 30% of the score.

The length of an individual’s credit history contributes around 15% to the overall score, reflecting how long accounts have been established. New credit, which includes recent credit applications and newly opened accounts, makes up approximately 10% of the score. The final 10% is determined by the credit mix, considering the diversity of credit types managed, such as credit cards and installment loans.

Impact on Credit Utilization

Canceling a credit card can significantly alter one’s credit utilization ratio, a key component of a credit score. Credit utilization is calculated by dividing the total outstanding balances on all credit accounts by the total available credit across those accounts. A lower utilization ratio generally indicates responsible credit management and can positively impact a credit score.

When a credit card account is closed, its credit limit is removed from the total available credit. For example, if an individual has two credit cards, each with a $5,000 limit, their total available credit is $10,000. If they carry a $1,000 balance on one card, their utilization is 10% ($1,000 / $10,000).

Should one of those $5,000 limit cards be canceled, the total available credit would drop to $5,000. Even if the $1,000 balance remains unchanged, the utilization ratio would then increase to 20% ($1,000 / $5,000). This increase in the utilization ratio can signal higher credit risk to lenders, potentially leading to a decrease in the credit score.

Impact on Length of Credit History

The length of credit history is another important factor in credit scoring, reflecting the average age of all credit accounts. A longer credit history, especially one characterized by responsible payment behavior, can contribute positively to a credit score. This category considers the age of the oldest account, the age of the newest account, and the average age of all accounts.

When a credit card is canceled, the account generally remains on the credit report for a period of time, even though it is no longer active. Accounts that were in good standing with a history of on-time payments can remain on a credit report for up to 10 years after closure. However, accounts with negative information, such as late payments, typically remain for up to seven years from the date of the original delinquency.

While a closed account in good standing continues to appear on the credit report, its long-term effect on the average age of active accounts can diminish over time. If the canceled card was one of the oldest accounts, its closure could eventually lower the average age of all remaining active accounts, which might negatively influence the credit score. Maintaining older, well-managed accounts can be beneficial for preserving a longer average credit history.

Practical Considerations Before Closing an Account

Before deciding to close a credit card account, several practical steps should be considered to minimize potential negative impacts. It is advisable to pay off any outstanding balance on the card completely. Ensuring a zero balance before closure helps avoid lingering interest charges and facilitates a clean account termination.

Another important step is to redeem any accumulated rewards points or cash back associated with the card. Many credit card issuers have policies that result in the forfeiture of unredeemed rewards once an account is closed. These rewards can represent a significant value, so transferring or using them beforehand can prevent their loss.

Consumers should also assess whether the card carries an annual fee. While some cards have no annual fee, others may charge varying amounts. If the card has an annual fee that is not justified by its benefits or usage, closing it could save money, but understanding the fee structure is important. Finally, review your entire credit profile to understand the potential impact, especially if the card is your only one or one of very few.