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The Smartest Way to Close a Credit Card Without Dinging Your Credit

November 4, 2020

There are many reasons you may want to close a credit card. Maybe you want to simplify your personal finances by trimming the number of creditors attached to your name (and sending you mail) and have healthier financial habits. Or, perhaps you want to avoid an upcoming annual fee on a card you no longer use, or simply reduce the temptation to spend by a sticking to a budget. While these are all good reasons to cancel a card, before you do, it’s important to know how canceling a card can help or hurt your credit.

Does Closing a Credit Card Hurt Your Credit Score?

Closing a credit card can hurt your credit score because it can lower your available credit and increase your utilization rate, an important credit scoring factor. But with a little planning, you can avoid the potential negative impact of closing your credit card—and you may even be able to use it as an opportunity to improve your personal finances.

How Does Closing a Credit Card Affect Your Credit Score?

Closing a credit card can affect your credit scores in several ways—some of these will be more immediate than others. Let’s start with the immediate impact.

Closing a card can lead to a higher utilization ratio

The primary way closing a credit card can impact your credit is by decreasing your available credit, leading to a higher credit utilization ratio (or, utilization rate). Your utilization rate compares the amount of credit you’re currently using to your available credit limits.

Credit scoring models, including the popular credit scores that FICO and VantageScore create, look at your credit reports to find the balances and credit limits on your revolving accounts, such as credit cards and lines of credit.

To calculate your utilization rate, they divide your credit cards’ reported balances by their credit limits.

For example, let’s say you have four credit cards with a $5,000 credit limit on each. This would mean you have $20,000 in overall credit to spend. If the combined outstanding balances on those cards equal $5,000, you would have a credit utilization rate of 25%:

$5,000 combined balance ÷ $20,000 available credit = 25% credit utilization ratio

Now, let’s say you have three cards with a combined balance of $5,000, and one card with a $0 balance. If you close the $0 balance credit card (without paying down any of the outstanding $5,000 balance on the other cards), your utilization rate will be higher than the example above. This is because you have less credit available to you, yet you carry the same amount of debt.

$5,000 combined balance ÷ $15,000 available credit = 33% credit utilization ratio

It’s important to keep in mind that credit scores consider your utilization rates on individual credit accounts (each account separately), as well as your overall combined rate (all accounts taken together). You can use the credit utilization calculator to keep close tabs on your overall utilization rate as a lower overall utilization rate is better for your credit scores. In fact, your overall utilization rate can be one of the most important credit scoring factors behind your payment history.

As a general rule of thumb, most financial experts suggest keeping your overall utilization below 30%, but there’s no exact point when your utilization rate goes from bad to good. Just remember, strive for a lower overall utilization rate (versus worrying too much about each account individually).

Closing a credit card can eventually impact other scoring factors

Your credit history accounts for 15% of your credit score. Generally, the longer you keep accounts open, the longer your credit history, which translates to a more positive impact to your credit score.

However, closing a credit card won’t immediately cause your credit score to drop.

Any credit card in good standing with a $0 balance will remain on your credit report for 10 years after you close it. During this time, that card still “counts” toward your credit history.

However, after 10 years, the account will drop off and that’s when you may see your credit score go down. But how much it drops will depend on several factors. For example, if you only have two credit cards opened five years apart and you close your oldest card, you may see a bigger hit to your credit score when the account finally drops off. But if you have a healthy mix of credit across several years, one credit card dropping off (even if it’s your oldest card) likely won’t have much of an impact on your credit score.

The other thing to consider is how you leave the account. If you pay off your card before you close it, you’ll see 10 years of positive credit history and that’s the financial self care you need to foster. But if you close your account with an outstanding balance, your creditor will continue to report the balance and the card will only remain on your report for seven years. Ideally, aim to pay off any card in full before you close it.

Should I Cancel a Credit Card?

While closing a credit card won’t necessarily improve your credit scores, it might not be a bad idea if closing a card will help you improve your personal finances in other ways.

When canceling a credit card makes sense

You may want to close a credit card when:

  • You tend to overspend when you have access to credit and want to close the card to keep yourself from making unnecessary purchases and paying interest
  • You want to avoid paying a high annual fee by canceling the credit card before your cardholder anniversary
  • You’ve paid off the card’s balance and want fewer accounts to manage
  • You have an old credit card you never use anymore

In these cases, you may be helping yourself stay organized or save money. In turn, this gives you more money for other bills and paying down debt, which is a great credit score hack can help you improve your credit over time.

When you should keep a credit card open

If you’re thinking about closing a card but don’t have a good reason for doing so, then, depending on your credit profile, it may make more sense to keep your card open (until you have a solid reason for closing it).

You don’t even have to carry the credit card around in your wallet or use it for it to have a positive impact on your credit score. You could keep the card in a drawer, or even cut it up, and the unused card will benefit you by increasing your total available credit.

However, if you never use the card, eventually the credit card company may close your account due to inactivity. This could take several months to a year or more depending on the creditor. Read the disclosures that came with your credit card to find out if you’re at risk of inactivity closures. If you are, to avoid account closures and add on-time payments to their credit histories, some people will use a card only for a small monthly bill, such as a streaming service subscription, and set up automatic payments.

How to Cancel a Credit Card Without Hurting Your Credit

Here are a few tips for canceling a credit card without hurting your credit scores:

Limit your use of other credit cards

While lowering your available credit by canceling a card can lead to a higher utilization rate, that’s only true if your overall balance stays the same. By using your other cards less often or by paying down overall credit card debt, you may be able to cancel a card without increasing your utilization ratio.

Make early payments on your other credit cards

Credit utilization depends on the balance that’s reported to the credit bureaus—Experian, Equifax, and TransUnion. Credit card issuers tend to report balances around the end of your statement period, which is about three weeks before your bill’s due date. Paying down your balance before it gets reported can help you maintain a low utilization rate.

Ask the credit card issuer for a product change

Some card issuers will let you keep your same account and credit limit, but allow you to “product change” to a different type of credit card they offer. This can be helpful if you want to move away from a card that has an annual fee, or, if you want to upgrade a basic rewards card to one with a higher cash back rate or attractive promotion.

Managing Your Credit Cards and Credit Scores

Deciding which types of credit cards to open, when to close a card, and managing your credit card balances is an important part of successfully managing your personal finances. Maintaining good credit is crucial to avoid having a declined personal loan for the future and building good credit.

Once you understand how your revolving credit utilization rate fits into the picture, you can make an informed decision about when it makes sense to keep your credit cards open. And, when you want to close them, how to manage your other accounts to avoid hurting your credit.

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