Key Points:
- Closing a credit card can actually harm your credit score.
- Closing a credit card can significantly impact your credit utilization ratio, credit age, and credit mix, all of which can affect your credit score.
- There are valid reasons for closing a credit card, such as graduating from a secured card or paying a high annual fee.
- If you decide to close a credit card, make sure to pay off the balance, update recurring payments, and redeem any rewards.
- There are alternatives to closing a credit card, such as requesting a downgrade or product change to a card with no annual fee.
Got an old credit card lying around? It may be tempting to cancel it, cut it up, and toss it in the trash. But before you get out the scissors, it’s important to think about how closing a card can affect your credit score. While it sounds counterintuitive, closing a credit card can actually harm your score. We break down the reasons — and how you can cancel your card the right way.
Does closing a credit card hurt your credit?
There are a few situations where closing a card can hurt your score, even if you’re closing a card in good standing. First things first, it’s important to understand how credit scores work. The most commonly used credit scoring model is FICO, which ranges from 300 to 850. Your credit score is calculated based on your payment history, credit utilization, credit age, credit mix, and recent credit inquiries. Here’s a closer look at how closing a credit card can affect some of these factors.
Credit utilization ratio
Closing a credit card can significantly impact your credit utilization ratio or the amount of credit you use out of your total credit limit. For example, if your credit limit across all your cards is $10,000 and your total balances add up to $2,500, your utilization ratio is 25%. A good rule of thumb is to keep your utilization ratio under 30% — the lower, the better. If you have a low credit limit and decide to close one of your cards, your overall utilization may increase, causing a dip in your credit score. “High utilization can signal potential over-reliance on credit and a higher risk to creditors extending your credit,” says Riley Adams, certified public accountant and CEO of WealthUp.
Credit age
Credit age is less impactful on your score than credit utilization, but closing a card can make your credit history appear shorter than it is. Closing your oldest credit card can shorten the average age of your accounts, potentially lowering your credit score. That said, your closed card accounts remain on your credit report for up to 10 years and can help bolster your score.
Credit mix
Creditors like to see a mix of different types of credit on your report, like credit cards, loans, and mortgages. Closing a credit card can reduce the variety of credit accounts you have, potentially impacting this part of your credit score.
When it makes sense to close your credit card
There are plenty of valid reasons to get rid of your card. Here are some of them:
- You’ve graduated from a secured card: If you’ve built a credit history and are ready to apply for an unsecured card, closing the secured card you no longer need only makes sense.
- You’re paying a high annual fee: If your expensive card no longer works for you, there’s no reason to keep paying. Many issuers will let you downgrade to a no annual fee card to avoid closing your account completely.
- You’re no longer using your card’s perks: As with other annual fee cards, don’t pay for a card you can’t use anymore.
- You’re closing a joint credit account: Remember that you’ll need consent from the other account holder to close this account.
- You’re struggling with overspending: Carrying credit card debt and making late payments is much worse for your credit score than closing a card. If you’re struggling to pay off your credit card bill or are carrying a balance, you may want to consider closing your card.
- Your interest is too high: If you’re struggling with a high-interest card, you may want to consider a balance transfer card to pay it off.
- You’re having a poor customer experience: Like any other business, if you’re unhappy with your card issuer’s customer service, find someone else. The competition is fierce out there.
Alternatives to closing a credit card
Closing a card just for the sake of closing can backfire. If the card doesn’t have an annual fee, just put it on ice — or in a drawer. You should still try to use the card once or twice a year. Otherwise, the issuer may shut it down for “inactivity.” If your card has an annual fee, ask your issuer for a downgrade or product change. Most larger financial institutions offer cards with no annual fee you can switch to. You can often keep the same card number and the same credit line. You can also upgrade your card — especially if you want travel rewards. If you’re dissatisfied with your current card’s perks, it might be time for something more glamorous. You’ll get more perks and privileges, although with a higher annual fee. Like with a downgrade, your card issuer can often switch you without requesting a new card.
How to close a credit card the smart way
The easiest way is to call your issuer and tell them you want to close the card. They may offer you the chance to upgrade or downgrade your card without hassle. But if you’re ready to say goodbye, there are ways to close your card and minimize the potential damage to your score. Jeff Rose, certified financial planner and founder of Good Financial Cents, shares some tips.
- Pay off the balance: Rose calls it wiping the slate clean: “Make sure you’ve paid off any remaining amount on the card. It prevents any lingering debts from complicating things after the card is closed.”
- Update recurring payments: If you have any bill payments or subscriptions tied to that card, switch them to another payment method, Rose says. Failure to do so may lead to missed payments.
- Redeem your rewards: Many cards void the rewards you’ve earned after the card is closed. Don’t leave money on the table, warns Rose.
When you call to close your card, the agent will likely read you some terms and conditions and execute the closure. But there’s one more thing you should do for peace of mind, says Rose. “After you’ve initiated the closure, send a confirmation email or letter,” says Rose. “This creates a paper trail, providing you with proof of your request to close the account. This step is a safeguard against any future disputes or errors in your credit report.”
Bottom line: When you close a credit card, you may hurt your credit score — mainly because your credit utilization ratio may increase. To avoid this, try to close your card only if you have a good reason, like an annual fee you want to avoid, high interest, or poor customer service. There are often safer alternatives to closing a credit card. You could request a downgrade or a product change to a card with no annual fee. If your card already doesn’t charge a fee, consider sticking it in a drawer. You don’t have to use the card but should keep it nevertheless.
