Does Cancelling a Credit Card Hurt Your Credit Score?
At a Glance:
Canceling credit cards can hurt your credit score. While there are some valid reasons for canceling a card – such as a high annual fee – be careful about closing old accounts because doing so can cause your credit score to drop. Closing cards also won't remove negative information from your credit report, so don't close cards to try to clean up your credit.
When I was in college, I opened a slew of credit cards, including some store cards, because I didn't know any better. After graduation, I decided I didn't want to have all that credit available, so I closed the accounts. Unfortunately, I didn't realize that by closing open credit cards, I was actually hurting my credit score and what was reported by credit bureaus.
After learning more about money, I now understand that when you close credit accounts, you can hurt your credit score in a few ways. Closing old accounts both reduces the average age of credit and it reduces your available credit limit and can raise your overall credit utilization– both of which adversely affect your credit score.
Closing credit cards has consequences, so it's something you should think about carefully before you do it. There may still be reasons to cancel accounts you aren't using anymore – such as if you can't get your spending under control, or if you are being charged an annual fee for a card you no longer use. But, deciding to close an account isn't a decision to be entered into lightly. You need to know the facts and the negative impact cancelling a credit card can have.
Should You Cancel Your Credit Card?
When I closed my old credit cards that I wasn't using, I made a big mistake because there was no reason I couldn't have kept those accounts open. I wasn't being charged an annual fee for them, nor was I using them. Since it didn't hurt anything to keep the cards open, there was no reason to accept the hit to my credit that came with shutting them down.
This isn't always the case. In fact, there are two situations where you may need to cancel a card, even if it could cause your credit score to temporarily decline. You should strongly consider canceling your card if:
- You're having trouble controlling your spending
- You're paying high fees for having the card
Even in these situations, there may be solutions that don't involve canceling. You can call the creditor and ask for a waiver of fees, for example. Or you can try to downgrade the card to one that doesn't have an annual cost. You can also cut up the card so you can't use it any more if you're having trouble avoiding spending – but the account can remain open.
If either of these approaches works, you can avoid the downsides that come with closing cards.
What to Consider Before Canceling a Credit Card
Before you cancel a card, it's important you understand exactly what impact of closing the account will have.
First and foremost, you should know that closing the account won't help to improve your credit by removing any negative information associated with the account from your credit report.
Closed accounts will show up as closed, but they will still remain on your credit report for many years after the account is no longer open. In fact, on my personal credit report, I still have numerous closed accounts listed, complete with the full payment history for each one. And closing an account not remove any of the past negative details about the account, such as a history of late payments.
Closing an account actually can damage your credit in three ways. The move affects your available credit utilization, the age of your credit, and the different types of credit on your credit report.
Available Credit Utilization Rate
Utilization rate, the amount of your available credit you have used, is one of the most important factors in determining your credit score, and it accounts for 30% of your FICO score.
If you have $10,000 in credit available for you to use and you have only charged $1,000 on your credit cards, your credit utilization ratio is 10%.
If you close old credit card accounts, you reduce the amount of available credit. So, if your balance stays the same, your credit utilization ratio suffers. In the above example, let’s say the $10,000 in available credit was spread across two accounts, each with a $5,000 limit. If you close one of those two accounts, you're now using $1,000 out of $5,000 in available credit, as opposed to $1,000 out of $10,000 available. So, your new credit utilization ratio is 20%.
The lower your credit utilization ratio, the better for your credit score as credit card companies tend to get nervous when you max out your accounts. Ideally, your credit utilization ratio should be below 30% of the credit available to you. Maintaining a low ratio gets harder with the more accounts you close because your available credit declines. In many cases, this is why having an unused card can actually be good for your credit score since it can increase your total available credit.
Age of Credit
Age of credit is another factor that helps to determine your credit score. Your oldest accounts help boost your credit because creditors assess your payment history and borrowing behavior over a long timeline.
Unfortunately, if you close older accounts, you could end up lowering the average age of your credit since those accounts will no longer exist. For example, if you opened a new credit card one year ago and an old credit card 10 years ago, the average age of your credit would be 5.5 years. But, if you closed the original card you'd, the new average age of your credit would be just one year because of your new card.
The bottom line is that by closing credit cards, that can shorten your credit history can definitely damage your score.
Different Types of Credit
Finally, having a mix of different kinds of credit is also a factor in determining your credit score. Lenders like to see you've been responsible with different kinds of borrowing, so it's good to have a blend of credit cards, car loans, personal loans, a mortgage, and other kinds of debt on your credit report.
If you close credit cards, however, you'll no longer have as diverse a mix of different kinds of credit and your score may suffer.
What if You Decide Closing the Account is Best?
While closing your credit card accounts can definitely have adverse consequences, you may decide to go forward with your plans to close the account anyway, especially if you're paying a big annual fee or just can't manage to stop spending.
If you've decided to close your old card account or a card account you don't want to use anymore, make sure you take the right steps. This involves:
- Contact card member services. Often, you'll need to reach out via phone to the credit card issuer to get your card canceled. Make sure you have your account number and identifying information ready. You'll likely be asked why you're closing the account – and if it's because of high fees or poor service, don't be afraid to speak up. They may be able to fix your issues so you can keep your card.
- Redeem rewards before closing the account. You don't want to let rewards go to waste. And, once your card is closed, you won't be earning any more points or cash back. You should make the most of the rewards you have by cashing them in or redeeming them before closing the account.
- Ensure the card has a zero balance. Typically, card issuers require this before they'll close an account. You don't want the card to accidentally remain open – especially if you are charged a fee – just because you missed a final interest payment.
By behaving responsibly when you decide to cancel a credit card, you can avoid potential financial problems in the future. Just remember to learn from my mistake and avoid closing old credit cards unless there's a good reason.