Should You Close a Credit Card? Understanding the Impact on Your Credit

Key Takeaways

• Closing a credit card can potentially lower your credit score by affecting your credit utilization ratio and the length of your credit history.
• Think carefully before closing older cards, as they often contribute positively to your credit history length.
• A high credit utilization ratio (how much credit you're using compared to your total available credit) can hurt your score, and closing a card can increase this ratio.
• For cards with annual fees, consider alternatives like downgrading or balance transfers before closing.
• CredNudge provides educational guidance only and does not make guarantees regarding credit outcomes.

Deciding whether to close a credit card can feel like a big decision. On one hand, fewer cards might mean easier management. On the other hand, you might have heard that closing a credit card can actually hurt your credit score. This article will help you understand the potential impacts and what to consider before making a move.

How Closing a Credit Card Can Affect Your Credit Score

Your credit score is calculated using several factors, and closing a credit card can influence at least two major ones: your credit utilization ratio and the length of your credit history.

1. Your Credit Utilization Ratio

Your credit utilization ratio is a key factor in your credit score. It's the amount of credit you're currently using compared to your total available credit across all your accounts. For example, if you have a total of $10,000 in credit limits across all your cards and you've used $2,000, your utilization ratio is 20%.

Lenders generally prefer to see this ratio below 30% – lower is often better. When you close a credit card, you lose that card's credit limit from your total available credit. Even if your spending doesn't change, your utilization ratio could increase.

Practical Example:

Imagine you have two credit cards:

• Card A: $5,000 limit, $500 balance
• Card B: $5,000 limit, $500 balance

Your total available credit is $10,000, and your total balance is $1,000. Your credit utilization is ($1,000 / $10,000) = 10%.

Now, if you close Card A:

• Card B: $5,000 limit, $500 balance

Your total available credit is now $5,000, and your total balance is $500. Your credit utilization jumps to ($500 / $5,000) = 10% (in this specific case, it stayed the same because you only had a balance on the card you kept). However, if you had a balance on both cards, or on the card that you close, the impact could be negative.

Let's use another example where the impact is clearer:

• Card A: $5,000 limit, $1,000 balance
• Card B: $5,000 limit, $0 balance

Total available credit: $10,000. Total balance: $1,000. Utilization: ($1,000 / $10,000) = 10%.

If you close Card B (the one with no balance):

• Card A: $5,000 limit, $1,000 balance

Total available credit: $5,000. Total balance: $1,000. Utilization: ($1,000 / $5,000) = 20%. Your utilization ratio doubled by closing a card you weren't even using.

2. Length of Your Credit History

The length of your credit history is another important factor. Credit scoring models often consider the age of your oldest account, the age of your newest account, and the average age of all your accounts. Generally, a longer credit history is seen more favorably by lenders, as it provides more data to assess your reliability.

When you close an older credit card, especially one you've had for many years, it can reduce the average age of your credit accounts. While a closed account with a positive payment history will typically remain on your credit report for up to 10 years after closing, its positive impact on your average account age may diminish over time, or be immediately impacted by the removal of its credit limit from utilization calculations.

When Might Closing a Credit Card Be an Option?

Despite the potential downsides, there are situations where closing a credit card might make sense.

1. High Annual Fees for Unused Cards

If you have a card with a significant annual fee that you no longer use or whose benefits you don't utilize, the fee can outweigh the benefit of keeping the account open. Before closing, consider calling the issuer to see if they can waive the fee, offer a retention bonus, or downgrade your card to a no-fee version. This is often called a 'product change' and can keep the account open with its credit history intact, but without the fee burden.

2. Temptation to Overspend

If a particular credit card leads you to impulsive spending or makes it difficult to manage your finances, closing it might be a step towards better financial discipline. Your financial well-being is paramount, and sometimes, removing temptation is the best course of action. However, focus on building healthier spending habits first.

3. Duplicate Accounts or Too Many Cards

Having too many credit cards can sometimes feel overwhelming. If you have multiple cards with similar benefits or very low limits that don't add much value, you might consider closing one or two of the least impactful ones, especially if they are newer accounts that won't significantly impact your average credit history length.

Actionable Steps Before Closing a Credit Card

If you're still considering closing a card, follow these steps:

1. Pay off the balance completely: Make sure the card has a zero balance before requesting to close it. This prevents any remaining debt from accruing interest or potentially being sent to collections.

2. Understand your credit utilization: Check your current credit utilization across all your cards. If it's already high (e.g., above 30%), closing a card with available credit will make it even higher. Consider paying down other card balances first.

3. Identify the card's age: If it's one of your oldest accounts, closing it could have a more significant impact on the length of your credit history. Prioritize keeping older, positive accounts open.

4. Look for alternatives: As mentioned, can you product change to a no-fee card? Can you call the issuer for a fee waiver?

5. Spread out major financial applications: Avoid closing a card right before applying for a major loan, like a mortgage or car loan, where your credit score will be heavily scrutinized.

6. Confirm closure and get written proof: Once you decide to close a card, contact the issuer directly. Ask for confirmation in writing that the account has been closed at your request with a zero balance.

Building a Healthy Credit Profile

Ultimately, a healthy credit profile is built on consistent, responsible credit use. This includes making all payments on time, keeping your credit utilization low, and maintaining a diverse mix of credit accounts over a long period. Instead of quickly closing accounts, focus on managing your existing credit cards well and letting your positive credit habits shine through your credit report.

If you're looking to understand your credit situation better, consider exploring CredNudge's tools and resources. Start your journey with CredNudge today!

Frequently Asked Questions About Closing Credit Cards

Q1: Will closing a credit card instantly lower my credit score?

Not necessarily instantly, but it can. The impact isn't always immediate and depends on various factors, especially how it affects your credit utilization ratio and the average age of your accounts. If your utilization increases significantly, you might see a score drop.

Q2: Should I close a credit card if I'm not using it?

Generally, it's better to keep unused credit cards open, especially if they are older accounts and have no annual fees. They contribute to your total available credit, which helps keep your utilization ratio low. As long as there's no fee, consider using it for a small recurring payment that you pay off in full each month to keep it active.

Q3: How long do closed credit card accounts stay on my credit report?

Positive closed accounts, meaning those paid on time, can remain on your credit report for up to 10 years from the date of closure. Negative closed accounts (with late payments or defaults) can remain for 7 years.

Q4: What's better: closing a card or cutting it up?

Cutting up the physical card is an important step if you want to stop using it, but it doesn't close the account. You need to formally contact the credit card issuer to close the account. Just cutting the card doesn't impact your credit report; closing the account does.

Q5: Can I re-open a credit card after I've closed it?

In most cases, no. Once an account is officially closed, especially by your request, it's typically permanently closed. If you want credit with that issuer again, you would likely need to apply for a new card, which would involve a hard inquiry on your credit report.

Disclaimer: CredNudge provides educational guidance and information only. We do not offer financial advice or guarantee specific credit outcomes. Your individual financial situation and credit decisions are your responsibility. We encourage you to consult with a qualified financial advisor for personalized advice.

Learn more about managing your credit and building a strong financial future with CredNudge's educational resources or try our credit score simulator to free credit score simulator (see how) different actions might affect your score.

Sources

• FTC: Fixing your credit FAQs