Whether you’re trying to break a habit of overuse, ditch a high annual fee, or just simplify your finances, closing a credit card account will have an impact on your credit score. Here are some takeaways to consider before you make your decision.
How could my score be negatively affected?
When you close a credit card account, two things can happen:
- The average age of your accounts could go down if you close a card that is much older than your other accounts.
- It will reduce how much available credit you have access to, which could affect your credit utilization (i.e., the amount of debt vs. total available credit).
Why do these two things matter? Because the age of your accounts and your credit utilization weigh heavily on your overall credit score. For example, say you have three credit cards:
Credit Card #1: 10-year-old account. You owe $0 and the limit is $7,000.
Credit Card #2: 2-year-old account. You owe $1,000 and the limit is $2,000.
Credit Card #3: 1-year-old account. You owe $2,400 and the limit is $4,000.
Your total available credit is $13,000 and you’ve used $3,400 of that, so your credit utilization is 26% with a 10-year credit history.
If you close Credit Card #1 because you’re no longer using it, you still have the same amount of debt, but your available credit has gone down to $6,000, and thus, your credit utilization will go up to 57% — much higher than the 30% threshold experts recommend. As a result, your credit score could be negatively impacted.
And while the closed 10-year-old account will still appear on your report for another 10 years, once it comes off, it won’t be counted toward the length of your credit history, which could result in another ding to your credit score.
When should I close a credit card?
Because of the reasons stated above, it’s almost always best to leave a credit card open with a zero balance rather than close the account. But there is one instance where it might make sense.
If you’re paying a high annual fee for a credit card you rarely use, it’s likely you aren’t earning enough rewards to cover the costs of the fee. In this case, call the card issuer and request that the fee be waived, or ask to downgrade to a different card that doesn’t include an annual fee. At least that way, you keep the credit line open and available, should you need it. If the issuer is unwilling to make a change, closing it might be your best and only option to avoid paying hundreds of dollars for nothing.
If you’re thinking about closing your credit cards because you cannot control your spending, consider removing them from your wallet and putting them in a safe place, or even cutting them up, and leaving the accounts open. If you have too many credit cards and are finding it difficult to keep track of and pay them all on time, consider transferring some of your balances to one or two cards to simplify your payments. Keeping the accounts open will ensure you maintain healthy credit utilization and your accounts continue to age.
And remember, because closed accounts remain on your credit report for 10 years, negative payment history is not a reason to close an account. You can’t hide missed payments from future creditors or increase your score by closing bad accounts.
Tip: If you leave a credit card inactive for too long, the issuer may try to close the account. To avoid this, try using the card for a small purchase every six months. If you don’t want to go down that road, you can let the closure happen. There will be less of a negative impact on your credit than if you’d closed the card yourself.