When considering closing a credit card, many people wonder about the impact this decision will have on their credit score. The relationship between closing credit cards and credit scores is complex, with several factors coming into play. Understanding these effects can help you make an informed decision about whether to keep or close your credit accounts.
Key Takeaways: Credit Card Closure Impact
- Closing a credit card can immediately increase your credit utilization ratio by reducing your total available credit, potentially lowering your credit score
- Your credit history length may be affected long-term once the closed account drops off your credit report after 10 years
- Cards with no annual fees are often better kept open to maintain your credit profile, especially if they’re older accounts
- There are strategic alternatives to closing such as downgrading to a no-fee version or keeping the card active with minimal use
- Timing matters – avoid closing cards when you’re planning to apply for new credit like a mortgage or auto loan
- The impact varies by individual depending on your overall credit profile, number of other accounts, and current utilization rates
Understanding Credit Score Factors
Your credit score is influenced by multiple components, and closing a credit card can affect several of these elements simultaneously. The two main factors that closing a credit card impacts are your credit utilization ratio and your length of credit history.
According to FICO, the amount you owe makes up 30% of your credit score. This is broken up into several subcategories, one of which is credit utilization. This represents the total of balances on all your revolving accounts compared to your total credit limit. When you close a credit card, you lose that card’s credit limit, which can cause your overall utilization rate to increase. For example, if you have two cards with $5,000 limits each and carry a $2,000 balance on one card, your utilization is 20%. If you close the unused card, that same $2,000 balance now represents 40% utilization, which can negatively impact your credit score.
The length of your credit history also plays a significant role in your credit score calculation. This includes both the age of your oldest account and the average age of all your accounts. Closing an older credit card could potentially reduce both these metrics, especially if it’s one of your longest-standing accounts.
The Short-Term Impact of Closing a Card
Immediately after closing a credit card, you might notice several changes to your credit profile. The most immediate effect typically comes from the change in your credit utilization ratio. This impact can be particularly pronounced if you carry balances on other cards or if the closed card had a high credit limit.
Your credit mix, which represents the variety of credit types in your profile, might also be affected. This is especially true if the card you’re closing is your only credit card. Having a diverse mix of credit types, including both revolving credit (like credit cards) and installment loans, can positively influence your credit score.
Additionally, any recurring payments or subscriptions linked to the closed card will need to be updated to prevent missed payments, which could severely impact your credit score. It’s essential to review and transfer any automatic payments before closing the card.
Long-Term Considerations
The long-term effects of closing a credit card can vary depending on your overall credit profile. Closed accounts with positive payment history typically remain on your credit report for 10 years, continuing to contribute positively to your credit score during this time. However, once the account drops off your credit report, you might see some changes in your credit score.
For newer credit users, keeping older accounts open can be particularly beneficial as they help establish a longer credit history. On the other hand, if you have several other long-standing accounts, closing one card might have minimal long-term impact on your credit age.
Consider also that closing a credit card might affect your ability to qualify for new credit in the future. Lenders often look at your total available credit and utilization when making lending decisions. Having more available credit (through open cards) can make you appear less risky to potential lenders.
When It Makes Sense to Close a Card
Despite the potential credit score impact, there are legitimate reasons to close a credit card:
High Annual Fees: If you’re paying substantial fees for a card whose benefits you no longer use, closing it might make financial sense. However, first consider downgrading to a no-fee version of the card if available.
Security Concerns: If you’ve experienced fraud on the account or have trouble controlling spending, closing the card might be the best option for your financial health.
Relationship Changes: Joint credit cards after a divorce or separation often need to be closed to prevent future liability issues.
Account Management: Having too many cards can make it difficult to track expenses and payment due dates, potentially leading to missed payments that would harm your credit score more than closing a card.
How to Close a Card Safely
To minimize the negative impact on your credit score when closing a card, follow these steps:
- Pay off the entire balance or transfer it to another card with better terms.
- Redeem any remaining rewards points or cash back.
- Update any recurring payments to a different card.
- Consider timing—avoid closing cards when planning to apply for new credit soon.
- Keep your overall credit utilization low by paying down other card balances.
- Document the closure by requesting written confirmation from the issuer.
Alternatives to Closing a Card
Before closing a credit card, consider these alternatives that might better serve your financial interests:
Convert to a No-Fee Card: Many issuers allow you to switch to a card without an annual fee while maintaining your account history.
Keep the Card Active: Make small purchases periodically and set up automatic payments to maintain the account without risk of closure due to inactivity.
Reassess Card Benefits: Review the card’s features and benefits to ensure you’re not overlooking valuable perks that might justify keeping the card open.
Frequently Asked Questions
How long does a closed credit card stay on your credit report?
Positive accounts typically remain on your credit report for 10 years from the closure date, while negative accounts stay for 7 years from the first delinquency. During this time, the account's payment history continues to influence your credit score, though its impact may gradually diminish. After the account drops off your report, your credit score might fluctuate as the mix of remaining accounts shifts.
Can you reopen a closed credit card?
Generally, once a credit card is closed, it cannot be reopened. Most credit card issuers treat account closures as permanent, regardless of whether you or the issuer initiated the closure. You would need to apply for a new card, which would result in a hard inquiry on your credit report and start a new account history. Some issuers might offer to reinstate a recently closed account in rare circumstances, but this usually only applies within a very short window after closure (often 30 days or less).
Should I close credit cards I never use?
If the card has no annual fee, it's often better to keep it open and use it occasionally to maintain account activity. This helps maintain your credit utilization ratio and length of credit history. Consider making a small purchase every few months and setting up automatic payments to keep the account active. However, if managing multiple cards becomes overwhelming or leads to overspending, closing unused cards might be worth the potential credit score impact.
Does closing a credit card hurt your credit score immediately?
The impact can be immediate if it significantly changes your credit utilization ratio. However, the severity depends on your overall credit profile and the specific card being closed. For example, if you close a card with a $10,000 limit and have $2,000 in balances across other cards with a total limit of $5,000, your utilization would jump from 13.3% to 40%. The impact is typically more pronounced if you have a limited credit history or few other credit accounts.
What happens if I close my oldest credit card?
Closing your oldest credit card could eventually impact your length of credit history, but this effect won't be immediate since closed accounts remain on your credit report for up to 10 years. After this period, your average account age might decrease, potentially affecting your credit score. This impact is typically more significant for those with shorter credit histories or fewer accounts. Before closing your oldest card, consider whether you can convert it to a no-fee version instead.
Is it bad to close a credit card with zero balance?
Even with a zero balance, closing a credit card can affect your credit score through changes in your credit utilization ratio and, eventually, your length of credit history. The impact might be minimal if you have other cards with high limits and low balances. However, if the card represents a significant portion of your available credit, closing it could notably increase your overall utilization ratio, even if you're not carrying any balances.
How many credit cards are too many?
There's no universal "right" number of credit cards—it depends on your financial habits, spending needs, and ability to manage multiple accounts responsibly. Some people successfully manage numerous cards to maximize rewards, while others prefer keeping things simple with just one or two cards. The key factors to consider are whether you can track payment due dates, avoid overspending, and justify any annual fees through card benefits and rewards.
What should I do with unused credit cards?
Instead of closing unused credit cards, consider these alternatives: make small purchases periodically to keep the account active, set up automatic payments for a recurring bill, or store the card securely while maintaining account monitoring for fraud. If the card has an annual fee, contact the issuer about downgrading to a no-fee version. Keep in mind that some issuers may eventually close inactive accounts, so occasional use might be necessary to maintain the account.
How badly does closing an account hurt your credit?
The impact of closing a credit card varies significantly based on factors like your credit history length, number of other accounts, and current credit utilization. The effect might be minimal if you have multiple other long-standing accounts and low credit utilization. However, if the closed card represents a significant portion of your available credit or credit history, the impact could be more substantial. Credit scoring models consider multiple factors, so maintaining good payment history and low utilization on remaining accounts can help offset any negative effects.
Conclusion
The decision to close a credit card should be made carefully, weighing both the immediate and long-term impacts on your credit score against the practical benefits of closing the account. While closing a credit card can temporarily affect your credit score, the impact doesn’t have to be severe if you plan carefully and maintain good credit habits with your remaining accounts.
Before closing any credit card, ensure you understand how it will affect your credit utilization and overall credit profile. Consider alternatives like downgrading to a no-fee card or keeping the account open with minimal usage. If you decide to close the card, follow the proper procedure to minimize any negative impact on your credit score.
