If you close a credit card, your credit utilization will go up, which is a key factor in figuring out your credit score. This can lower your credit score. Heres what to know.
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Because canceling a credit card can hurt your score, it’s smart to know what the potential impacts might be before making any moves.
Because closing a card could hurt your credit score doesn’t mean you should never do it, but you should be smart about it and make a smart choice.
Removing a credit card from your wallet can feel liberating. One less card to keep track of and one less bill to worry about paying. But before you cut up those plastic rectangles it’s important to understand how removing a credit card could impact your credit score.
How Credit Utilization Impacts Your Score
One of the biggest factors in your credit score is your credit utilization ratio This measures how much of your total available credit you are using at any given time. Experts recommend keeping your utilization below 30%
If you remove a credit card, especially one with a high limit, it lowers your overall available credit. For example, let’s say you have 3 credit cards with $5,000 limits each, so your total credit limit is $15,000. If you owe $3,000 across all 3 cards, your utilization is 20% ($3,000/$15,000).
But if you close one of those $5,000 credit cards, your available credit drops to $10,000. That $3,000 balance is now 30% of your credit limit ($3,000/$10,000). This jump in utilization can negatively impact your credit score.
How Credit History Impacts Your Score
The length of your credit history makes up 15% of your FICO credit score calculation. In general, the longer your credit history, the better your score. When you remove a credit card, it shortens the average age of your accounts which could lower your score, especially if it’s an old card.
But, despite what most people think, closing a credit card account does not erase all of its history. Your credit report will show closed accounts for up to 10 years. Having an account for a long time can help your credit score even after you close it.
When Does It Make Sense To Remove a Credit Card?
Even though closing a credit card account can hurt your credit score, there are times when it’s still a good idea:
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The card has an annual fee you no longer want to pay – If you’re no longer getting enough value to justify the fee, canceling can stop the expense.
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You want to reduce available credit and control spending – Eliminating access to credit can help if you are prone to overspending.
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You have retail cards you no longer use – Old store cards with low limits but recurring fees are good candidates for removal.
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You and your spouse are separating finances – Joint cards should be canceled to prevent unauthorized use.
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Poor customer service – Repeated bad experiences may warrant canceling and switching companies.
Alternatives To Closing an Account
Before you remove a credit card, consider these other options:
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Call the same card issuer and ask to switch to a fee-free card. This keeps your history.
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Use the card sparingly to keep it active, such as a small monthly subscription.
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Build your score with other accounts first, then you can remove cards without as much impact.
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Ask for a lower APR or credit limit increase before closing due to high utilization.
How To Safely Remove a Credit Card
If you do decide to part ways with a credit card, be strategic to minimize damage to your finances:
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Pay off any balance owed first. You are still responsible for debt after closing an account.
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Redeem any rewards or points before the card is closed.
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Formally request the closure with the card issuer by phone or certified mail.
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Note any automatic payments tied to the card and update them to a new payment source.
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Monitor your credit reports to ensure the account is properly closed without errors.
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If you need to replace the lost credit limit to keep your utilization, you might want to apply for a new card.
The Impact Over Time
How much removing a credit card hurts your credit score depends on your specific credit situation. The impact is usually more pronounced if you don’t have a lot of other credit accounts or if the closed card had a high limit.
The effect on your credit tends to diminish over time as well. A recently closed account will lower your score more than one closed years ago that shows a long history with positive payments.
Overall, removing a credit card that is costing you money in fees or enabling debt makes sense. Just be strategic about which cards you close and take steps to reduce the short-term credit score impact. With a little time your credit can recover and you’ll reap the long-term benefits of simplified finances.
You don’t use the card and it has a low credit limit
Just because a card in your wallet isn’t as active as it once was isn’t cause to close it. Find out if it has a small credit limit and, if so, you may see little or no effect. But if it has a large credit limit, closing that card could have a big effect on your score because you’re lowering your total available credit.
You have a store credit card, but you no longer shop there
Retailer credit cards tend to have relatively low credit limits, which means even modest use can lead to high credit utilization. If you no longer shop at that particular retailer though, it might be worth closing that account.
Should I Close a Paid Credit Card Or Leave It Open?
FAQ
Does canceling a credit card hurt your credit score?
Because canceling a credit card can hurt your score, it’s smart to know what the potential impacts might be before making any moves. Because closing a card could hurt your credit score doesn’t mean you should never do it, but you should be smart about it and make a smart choice. How does closing a card affect your score?.
Can closing a credit card affect your credit score?
While there are many good reasons to close your credit card account, you should be aware that doing so could hurt your credit score. There are many things that can lower your credit score, and you don’t want to bring more to the table.
Does an unused credit card affect your credit score?
An unused card can still play an important role in your credit file, especially if it has a high credit limit. That card’s available credit keeps your overall usage lower, which is a benefit to your score.
What happens if you don’t pay off a credit card?
Without balance repayment or transfer, this rise in utilization could drop your score by 10 to 50 points on average, though the impact varies depending on your personal financial circumstances. On the other hand, if you pay off the balance or transfer it to a card with a lower rate, the effect on your credit score may be minimal.
How does a credit card affect your credit score?
Can negatively impact your credit score. Simplifies finances and reduces clutter. May decrease your available credit, increasing your credit utilization ratio. Eliminates the temptation to overspend. Could shorten your credit history, affecting your average credit age. Reduces the risk of fraud on an inactive card.
Is it bad to close a credit card?
It’s not necessarily bad to close a credit card. However, the effects on your credit profile might not be worth it. A closed card in good standing will show up on your credit report for up to 10 years, though it shouldn’t contribute to your credit age anymore. When Does It Make Sense To Close a Credit Card?
Does removing credit card affect credit score?
Is it better to cancel a credit card or keep it?
Keeping an unused credit card open can benefit your credit score – as long as you follow good financial habits. If an unused credit card tempts you to unnecessarily spend or has an annual fee, you may be better off canceling the account.
How badly does canceling a credit card hurt your credit?
Will my credit score go down if I take out a credit card?
Does Opening a New Credit Card Hurt Your Credit Score? If you’re approved for a credit card, your account will be automatically opened. A new credit card can impact your credit score in a couple of ways: Length of credit history: The new account will lower the average age of your accounts.