When seeking to streamline your finances or rein in spending, you may be tempted to close a credit card or two. While this may seem like a helpful move, there are some pros and cons to consider.
Perhaps most significantly, closing an account may impact the variables that contribute to your credit score, such as the overall age of your credit lines or your utilization ratio, causing your score to decline. The hit to your credit score, however, is likely to be short-lived, and for some people, closing an account may still be the right move.
Why does closing your credit card impact your credit score?
If you’re having trouble controlling spending, eliminating a credit card can be a tempting step to take, particularly if you have multiple cards. But it’s a move that can negatively impact your credit score in various ways.
Multiple factors contribute to your credit score, including such things as the overall age of your open accounts, your total credit utilization ratio, and your credit mix, which is the different types of credit accounts you have open. All of these factors combine to make up what’s known as your FICO or Fair Isaac Corporation credit score, which is a widely used credit scoring model. And when you close a credit card, it can impact one or more of these variables.
“It may seem logical to close a card to eliminate the possibility of accruing more debt. However, closing your cards will not only lower your utilization, but it also removes credit history, which damages your score in the length of history category,” says Chris Fred, executive vice president and head of U.S. credit cards and unsecured lending for TD Bank. If you find yourself in a struggle with bad credit, consider working with a credit repair company to assist in improving your score.
Before closing an account, it’s important to review your credit profile with each of these factors in mind.
1. Increase in your credit utilization ratio
Your credit utilization ratio is the amount of your open credit lines—across all accounts—that you’re currently using. This part of your profile accounts for 30% of your FICO score. And when you close a credit card, you’re reducing available credit.
“When you close a credit card, you lose the available credit limit on your account. This can increase your utilization rate or your balance-to-limit ratio, which in turn will temporarily lower your credit score,” says Rod Griffin, senior director consumer education and advocacy at Experian. “How much your credit score decreases after you close a credit card will depend on your unique credit history.”
To help avoid being impacted by this particular factor, it’s a good idea to pay off credit card balances in full each month. And failing that, aim to at least keep your credit card balances below 30% of your available credit line for each card, which demonstrates responsible borrowing behavior.
2. Reduced length of credit history
Yet another element in your overall credit score is the average length of your credit history. This accounts for 15% of your FICO score. Closing a credit card can decrease the average age of your accounts, particularly if it’s a card that you’ve had for much longer than others. Closing your newest account, however, generally will have minimal to no impact on credit history.
A long credit history allows future creditors to assess your credit behavior and how you might handle credit moving forward.
The good news is this particular variable is not as important as other elements that contribute to your credit score. “This is usually not a major concern since accounts in good standing remain on your credit reports for ten years after they’ve been closed,” says Leslie Tayne, debt relief attorney and founder of Tayne Law Group.
3. Limits your credit mix
Your credit mix is the diversity of the types of credit accounts you maintain. A diverse credit profile for instance, might include auto loans, student loans, credit cards, and a mortgage. Your credit mix accounts for 10% of your FICO score and when you close a credit card, you may inadvertently be reducing that mix.
“Your mix might get overweighted to a particular loan type,” says Fred. “Maintaining a mix of credit demonstrates that you can handle multiple types of loans. Improving your credit mix can also help you reach a higher credit score status.”
When to close a credit card
While your credit score may take a short-term hit from closing an account, that doesn’t mean you should necessarily avoid taking this step altogether, particularly if doing so will be better for you over the long run.
“Concerns about the impact closing a credit card will have on your credit score should not keep you from doing so if it is the best move to protect your financial health,” says Griffin. “If you’re having trouble resisting the temptation to overspend, closing the card may be the better move for your financial health.”
If you can no longer afford the annual fees associated with the card or if you don’t use the card very much and don’t feel like you’re getting any value for the fee you’re paying, it may also make sense to close your credit card. Before taking this step, however, consider contacting your credit card issuer and find out whether you might be able to simply shift to a less expensive credit card account.
Additionally, if a credit card was opened jointly with someone else, and you no longer wish to have an account with that user, it may make sense to do away with the account.
Finally, if you simply no longer use a credit card, it may not be adding any value to your credit profile and may be worth closing.
“If you haven’t used an account for a year or two, it might make sense to close it anyway. Accounts with no activity may be excluded from score calculations, even if they are still in your credit report,” says Griffin. “Scoring systems typically require several months of consecutive activity to be included in the calculation.”
When to avoid closing a credit card
There are a few scenarios in which you may want to avoid closing a credit card as well. For instance, if your credit score is already low, it may perhaps be best to hold off closing an account rather than decrease your score further.
In addition, if you have significant balances across other credit cards, you may also want to pause on eliminating any accounts.
“If canceling a card, especially one with a high credit limit, would drastically increase your credit utilization rate, it may be a good idea to work on paying down your other card balances first in order to avoid a negative hit to your credit score,” says Griffin.
You’ll also want to think carefully about which credit cards you choose to close. It’s a good idea to avoid closing the credit card you’ve had the longest, as this will significantly decrease the length of your credit history, and thus more negatively impact your credit score.
The bottom line? When possible, avoid closing your credit cards and look for alternative options to reign in your spending. If you are trying to save on interest, consider a balance transfer or 0% APR credit card.
“In general, it’s a good idea to keep all of your credit cards open, even if you aren’t using them,” advises Tayne. “That’s especially true if you carry a balance across your cards or are working on repairing your credit. You can always cut up the physical card and keep the account active.”
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If you absolutely must close a credit card, there are a few steps you can take first in order to minimize the impact. The first step should always be to obtain your credit report and get a snapshot of your current standing across all accounts and your current score.
You’ll want to determine what your credit utilization ratio is and assess how closing an account might impact that ratio. If you have high debt across multiple cards or loans, consider paying down some balances prior to closing a credit card. Debt relief companies can be an option to help consolidate your debt.
“You can also ask for a credit limit increase on one of your other cards to offset the loss of a credit line so that your utilization rate stays the same,” says Tayne.
Finally, if your spending habits are not what’s driving you to close the account, it can also make sense to first open another new credit card that may be more valuable to you in terms of rewards offerings or other perks, in order to help maintain a healthy credit utilization ratio.
The takeaway
While everyone’s financial situation is unique, before closing a credit card, it’s a good idea to consider all of the ramifications and options. Review your credit score and calculate your credit utilization ratio prior to making any final decisions. But remember, your financial health is most important, and if closing a credit card is the best move, then it’s best to do so. The good news is, closing an account is not likely to have a long-term impact on your credit score.
