Closing a credit card might seem like a simple financial decision, but it can have lasting impacts on your credit score and overall financial health that many don’t anticipate.
At a Glance
- Canceling a credit card can increase your credit utilization ratio, potentially lowering your credit score
- Closing older accounts may reduce the average age of your credit history, another factor that affects your score
- Consider keeping unused cards if you’re planning to apply for a mortgage, building credit, or if there’s no annual fee
- Before canceling, weigh factors like annual fees, spending habits, and whether the card offers unique benefits
How Closing a Credit Card Affects Your Credit Score
When you close a credit card, two major components of your credit score can be immediately affected: your credit utilization ratio and the length of your credit history. Your credit utilization ratio—the percentage of available credit you’re using—often increases when you close a card because you’re reducing your total available credit while maintaining the same amount of debt. Financial experts typically recommend keeping this ratio below 30% to maintain a healthy credit score. Closing a card with a high credit limit can cause this ratio to jump significantly, especially if you carry balances on other cards.
“Closing a credit card might hurt your credit score because removing a portion of your available credit will cause your credit utilization, a key credit scoring factor, to rise,” according to NerdWallet. The impact is particularly significant for those who are relatively new to credit or have limited credit history. Your credit utilization ratio answers the question, “What percent of my available credit am I using?”
Additionally, closing one of your oldest credit cards can reduce the average age of your accounts, which comprises about 15% of your FICO score. The longer your credit history, the better it generally is for your credit score. This means that keeping older accounts open—even if unused—can benefit your credit profile in the long run.
When to Keep an Unused Credit Card
Despite potential drawbacks, there are several scenarios where it makes sense to keep a credit card open, even if you rarely use it. If you’re planning to apply for a significant loan like a mortgage in the near future, maintaining your current credit profile is crucial. Lenders typically look for stability, and closing accounts shortly before applying for new credit can raise red flags. Additionally, if you’re still building your credit history, keeping the account open contributes positively to your credit age and available credit.
“Having good credit helps ensure you can secure loans, mortgages and credit cards with lower rates and favorable terms,” notes Bankrate. This underscores why maintaining a healthy credit profile should be a priority in your financial planning.
Cards without annual fees are especially worth keeping open since they provide credit benefits without costing you anything. Even cards with limited use may still be valuable for their impact on your credit score. Some cards also offer unique benefits that are no longer available to new applicants, making them worth retaining despite infrequent use. To prevent your card issuer from closing your account due to inactivity, consider setting up a small recurring payment on the card and paying it off immediately.
When Canceling Makes Sense
Despite the potential credit score impact, there are legitimate reasons to close a credit card. If managing multiple accounts becomes overwhelming and leads to missed payments, consolidating can be beneficial. High annual fees that outweigh card benefits are another valid reason to cancel, particularly if you’re not utilizing the card’s perks. For those who struggle with responsible spending, removing the temptation of available credit can be financially prudent.
“The ‘right’ number of credit cards varies from one person to the next,” according to Bankrate. Generally, having two to five cards is considered manageable for most people, but this depends entirely on your personal financial habits and ability to track multiple accounts.
Other reasons to consider cancellation include poor customer service experiences, transitioning to a better card with the same issuer, changes in relationship status that affect joint accounts, or simply no longer shopping at a specific retailer for store cards. Before making your decision, explore alternatives like negotiating better terms, downgrading to a no-annual-fee version of the card, or requesting a credit limit transfer to another card with the same issuer.
Steps to Properly Close a Credit Card
If you’ve decided that closing a credit card is the right move, following proper procedures can minimize negative impacts. Start by paying off any remaining balance and ensuring all pending charges have cleared. Check for and transfer or use any accumulated rewards points before they’re forfeited. Remove the card from all recurring payments to avoid disruptions to your services and potential late fees. Contact your card issuer directly—most prefer that you call the number on the back of your card to discuss closure options.
During your conversation with the issuer, request written confirmation of the account closure and verify that the account will be reported to credit bureaus as “closed by consumer” rather than closed by the issuer. After receiving confirmation, securely destroy the physical card by cutting through the chip and magnetic strip. Finally, monitor your credit reports in the following months to ensure the account is properly reported as closed and that no unauthorized activity appears.
Remember that the decision to keep or close a credit card should align with your overall financial goals and personal circumstances. By understanding the potential impacts and taking deliberate steps, you can make choices that support your long-term financial health.
