How Closing A Credit Card Impacts Your Credit Score
The main reason why you may choose not to close a credit card account is that it can lower your credit score. Let’s take a detailed look at the reasons why this happens.
Higher Credit Utilization Rate
The amount of credit you’re currently using as a percentage of your total available credit has a big impact on your credit score.
- Utilization counts for almost a third of your credit score.
- If the amount you currently owe exceeds 30% of your total available credit your score could start to suffer.
- Say you currently have two credit cards with a $5,000 limit on each and you owe $,2000 on your cards in total. Your current credit utilization would be $2,000/$10,000 or 20%. If you had to cancel one of your cards this figure would double to 40% and put you above the desired upper limit of 30%.
Unfortunately, when you cancel a credit card account you’ll reduce your total available credit.
This will increase your utilization automatically - even if you don’t spend another cent on your cards.
Lower Average Age Of Accounts
The age of your credit accounts can influence your credit score. In general, you’ll want to keep your older cards open as long as possible.
- The length of your credit history counts a full 15% toward your FICO score. If you close an account that you’ve had for years you could see an instant drop in your numbers.
- Many of us apply for a credit card straight out of high school. These older accounts can add valuable length to your credit history and should only be closed if they have high administrative fees.
Do's Of Closing Credit Cards
While closing a credit account can cause your FICO score to drop, it may also be a useful strategy to avoid paying fees on a card you don’t use or as a way to control your spending.
Here are some of the things you can do to ensure that you close your account in a way that won’t harm your credit score.
- Close unused cards that are costing you money. Those monthly or annual fees all add up - and if you’re not using the card regularly there may be little benefit to keeping it open.
- You may want to ask your card provider to lower the fees - and make sure to tell them that you’ll be closing the account if your fees stay the same.
- Keep a few accounts open. You need a small balance and a regular payment history to keep your score on the rise.
- Ensure that credit card activity has been reported to the bureaus. After you close your accounts you’ll want to obtain your free annual credit report and ensure that the accounts are not listed as open.
Don'ts Of Closing Credit Cards
There are ways of closing an account - and others that you should avoid. Don’t make these common mistakes:
- Cutting Or Throwing Away Your Card & Assuming It's Closed - Your account will remain open until you ask your card company or bank to close it. Destroying the actual card may prevent you from spending money, but it won’t close your account.
- Cancelling Many Cards At Once - Closing all your accounts at once could come across as a red flag to the credit bureaus and cause your score to drop.
- Using A Balance Transfer To Delay Paying Down Your Debt - The interest free period you gain should be used to pay down your debt - but you’ll need to budget effectively and have a surplus each month to do this effectively.
Closing your credit card accounts may be warranted if you need to control your spending or save money on fees when you don’t use a card anymore.
However, it may not be a good idea to close multiple card accounts at once or close an old account that contributes to the length of your credit history.
Following the dos and don’ts outlined above and weighing the benefits of closing your credit card account will help you make the decision that’s right for you.