How much does canceling a credit card hurt your credit

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Highlights:

• Closing a credit card could change your debt to credit utilization ratio, which may impact credit scores

• Closing a credit card account you’ve had for a long time may impact the length of your credit history

• Paid-off credit cards that aren’t used for a certain period of time may be closed by the lender

You’ve paid off your credit card, and you’re wondering if you should close the account - and whether that might impact your credit scores, for better or worse. The answer depends on your unique credit situation.  

Before you close a credit card account, consider the following:

• Closing a credit card could lower the amount of overall credit you have versus the amount of credit you're using (your debt to credit utilization ratio), which could impact your credit scores. You can calculate your debt to credit utilization ratio by adding all your available credit and all the debt you owe on those accounts. Divide the total debt by the total available credit. Creditors and lenders like to see a lower ratio of how much debt you have compared with how much available credit you have. 
• Closing a credit card account you’ve had for a long time may impact the length of your credit history, which is another factor generally used to calculate credit scores. In general, creditors like to see you’ve been able to properly handle credit accounts over a period of time.  
• If you have a paid-off credit card you haven't used in a certain period of time, it may be declared inactive and closed by the lender. 

If you do close a credit card account, it’s a good idea to review your credit reports to make sure the information is reported correctly. You’re entitled to a free copy of your credit reports every 12 months from each of the three nationwide credit bureaus by visiting www.annualcreditreport.com.

You can also create a myEquifax account to get six free Equifax credit reports each year. In addition, you can click “Get my free credit score” on your myEquifax dashboard to enroll in Equifax Core Credit™ for a free monthly Equifax credit report and a free monthly VantageScore® 3.0 credit score, based on Equifax data. A VantageScore is one of many types of credit scores.

A credit score is almost like a financial report card that tells lenders how well you can handle credit. It helps them determine whether to lend you money, how much to lend and with what terms.

Before you close a credit card account, you should consider how much of an impact canceling your card could have on your credit score, especially if you’re thinking of applying for a new loan.

Let’s say you have four credit cards, with balances on each one.

• Credit Card #1: $5,000 credit limit with a balance of $1,000
• Credit Card #2: $10,000 credit limit with a balance of $1,000
• Credit Card #3: $2,500 credit limit with a balance of $2,000
• Credit Card #4: $8,500 credit limit with a balance of $3,500

Your total credit limit from all four cards is $26,000. The total amount of credit you’re using is $7,500. To get your rate, you divide $7,500 by $26,000, which equals about 29% – that’s considered good.

If you pay off Credit Card #1 and keep the account open, your total credit limit would stay the same ($26,000) and the total amount of credit you’re using would drop to $6,500. Thus, your new credit utilization rate would be 25%.

However, if you pay off the card and then close the account, you would lose the $5,000 credit limit that goes with it. That means, your new total credit limit would be $21,000. Now, with the account closed, your new utilization rate would be about 31%, which is considered average.

By closing the account, you’ll have a higher rate than you had before you paid off your $1,000 credit card balance.

• There are lots of reasons you may need to close a credit card.
• However, canceling a credit card can hurt your credit score.
• If you need to close a card, consider how doing so affects your credit utilization ratio and the average age of your accounts.

You might what to close a credit card account for many reasons, from trying to consolidate your debt to eliminating an annual fee to separating from a spouse who shared an account. However, before you close a credit card, you'll want to evaluate the urgency of your decision. That's because closing credit cards can negatively affect your credit score.

Read this article to learn more about what happens when you close a credit card account. You'll also discover precautions you can take to ensure that your account closure doesn't cause too much damage.

How does closing a credit card affect your credit score?

Closing a credit card can indirectly hurt your credit score by driving up your credit utilization ratio and lowering the average age of your accounts. Fortunately, taking preventative steps can help reduce some of the impacts.

First, let's start with a dive into what goes into your credit score. In addition to the factors above, credit rating agencies also consider your credit mix, payment history and credit history. Your credit utilization ratio (reflected in your FICO score under amounts owed) and average account age represent 30% and 15% of your score, respectively. That means that nearly half of what comprises your score may be affected when you close a credit account.

That said, it's important to note that each credit agency has a slightly different formula for determining individual credit scores.

Credit utilization

Credit utilization refers to how much of your total credit limit you are using. It's often expressed in a ratio determined by what you owe on your credit cards compared to how much available credit you have. Credit utilization accounts for 30% of your FICO score.

When you close a credit card, you reduce the amount of credit available to you. So unless you also simultaneously pay off debt, your credit utilization ratio will increase. Credit bureaus usually prefer that you have a credit utilization ratio of 30% or less. A higher percentage could negatively affect your score.

On the flip side, if you have a credit card that you don't use very often — that can help improve your credit score. That's because that card's credit limit adds to your overall credit availability, reducing your credit utilization ratio. And a lower ratio can give your credit score a boost.

Average age of accounts

The average age of your credit accounts is another factor that impacts your FICO score (15%). Credit rating agencies consider how long you've held each account and calculate the average age of your accounts.

If you close a credit card, you shorten that account's duration, which may affect your overall average account length. In turn, that could negatively affect your credit score.

However, not all credit card accounts have the same impact. It all depends on the average age of your accounts. For example, if the average age of your accounts is five years, and you close a card you’ve had for one year — while keeping other, longer-held cards open — then that has less of an impact on the overall average.

But if — in the same scenario — you close a card you’ve had for 10 years, you may drop the average age of your accounts significantly. Therefore, it may be best to maintain accounts that you’ve had for a long time, even if you’re not regularly using them.

When to consider closing a credit card

If you have multiple credit card accounts, you may be wondering: is it bad to close a credit card? Even with the above considerations, people still may encounter valid reasons to close their credit card accounts. Again, you may be trying to avoid high annual fees, embarking on a debt management program or separating from a spouse.

You may also need to close accounts if you’ve been the victim of identity theft. You certainly don’t want to maintain credit accounts that you didn’t open or that were used for fraudulent purposes. If you have experienced identify theft, contact the credit bureaus to ensure that activity from those fraudulent accounts doesn’t appear on your credit reports.

But what about wanting to close a credit account to limit spending or reduce the likelihood of missed payments? This approach requires more consideration because of its impact on your credit score when closing a credit card.

Before asking yourself “should I close my credit card?,” you can consider a few alternatives. For instance, you may restrict the use of a specific card, cut it up or eliminate it from your digital wallet. Also, even if you close an account, missed payments and other credit missteps still show up on your credit report for up to 10 years.

So finding a way to preserve your account without incurring additional late payments may be better for your credit score than closing it altogether.

How to close a credit card safely

If you still need to close an account, you can take steps to mitigate the negative impact and maintain your good credit. For example, consider paying down the balance on your other cards, if possible. That way, you can help preserve a lower credit utilization ratio once you close your credit card.

Also, evaluate the age of your other accounts to ensure enough accounts of a decent age are open to minimize the impact on your credit history. Understanding how credit scores are calculated can help you reduce the effect of closing an account and help you make smarter decisions about your credit card accounts.

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