Key learning points
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Canceling a credit card can be damaging to your credit, but the impact depends on your credit history.
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Sometimes it makes sense to close a card, even though it may affect your credit rating.
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You can take steps to minimize the potential impact on your creditworthiness.
If you’re like most Americans, you have about four credit cards in your wallet. Closing a card you no longer want or need isn’t necessarily a bad thing, but the decision can hurt your credit score in some cases.
Before you cancel your credit card, you should understand how closing a credit card can hurt your credit. You should also know when it makes sense to do so and how to minimize the impact on your credit score.
How Closing a Credit Card Can Hurt Your Credit
Closing a credit card account can have a negative impact on your credit score, but how much it hurts your score depends on your credit history. Factors such as how many other accounts you have open, how long you’ve had the accounts, and the balances they carry can all play a role.
Closing a credit card can increase your credit utilization ratio
Your credit utilization ratio — the percentage of your available revolving credit that you’re using — is one of the most important factors in credit scoring models. It shows how well you’re managing your debt. The general rule of thumb is to keep your credit utilization ratio under 30%.
Because closing a credit card reduces the amount of credit available to you, it can increase your credit utilization ratio. For example, imagine that you have three credit cards with the following balances:
- Card 1: Balance $6,000 / Credit Limit $10,000
- Card 2: Balance $1,000 / Credit Limit $3,000
- Card 3: $0 balance / $12,000 credit limit
You borrowed $7,000 out of $25,000 in available credit, which means your utilization ratio is 28%. If you cancel card 3 because you are not using it, your available credit drops to $13,000, leaving you with a utilization ratio of 54%.
Closing your oldest card can shorten the length of your credit history
The length of your credit history is another factor that affects your credit score. This is determined by the age of your oldest account and the average age of your accounts. A long history of responsible credit use can improve your score.
Closing your oldest credit card will reduce the length of your credit history. However, it will not directly affect your credit score. Closed accounts can remain on your credit report for up to 10 years.
Closing your only credit card could impact your credit mix
Your credit mix refers to the different types of credit accounts you have. This includes revolving accounts, such as credit cards, and term accounts, such as a mortgage or car loan.
Having multiple types of accounts can improve your credit score because it shows that you can handle different types of debt responsibly.
Closing a credit card can affect your credit mix, especially if it is your only credit card account. The impact on your credit may not be significant, as credit mix is a relatively small factor in credit scoring models.
When It’s a Good Idea to Close a Credit Card
Despite the potential downsides of canceling a credit card, there are circumstances that make closing your account worthwhile. You may decide that it makes sense to close a card in the following situations:
- You have consolidated your debts:Once you open a balance transfer card, you can close the old account to avoid incurring new debt.
- You have a card with a high annual fee:Some premium credit cards have sky-high annual fees. If you rarely use the card or its benefits, that might not make sense.
- You have a card with a high interest rateIf you need to finance a large purchase, you may want to consider switching to a card with a lower interest rate.
- You have a joint credit card with your ex: Typically, you can only remove your name from a joint credit card by closing the account.
- You have a retail credit card for a store you no longer visit: Retail credit cards that can only be used at a specific store are not very useful if you don’t shop there.
- You must close the account to get a loan: Lenders sometimes require applicants to obtain a credit card to meet mortgage eligibility requirements.
- You tend to overspend on the cardResearch shows that consumers spend more when they use a credit card, compared to cash or a debit card.
How to Minimize the Credit Impact When Closing an Account
While closing a credit card can sometimes hurt your credit, there are ways to minimize the potential damage. Here are some strategies to consider.
Transfer your recurring payments to another card
Automatic credit card payments are a convenient way to ensure that your gym membership, streaming subscriptions, or utility bills are paid on time. Remember to switch your recurring payments to another card before you close a card to avoid missing a payment or paying late.
Check your credit report
Once you receive confirmation that your account has been canceled, check your credit reports with all three major credit bureaus (Equifax, Experian, and TransUnion). Check to see if the credit card is listed as a closed account with the note “closed at customer request.”
If an error has been made, please contact your credit card issuer to have the error corrected.
Use your other credit accounts responsibly
When you cancel one of your credit cards, use your other credit cards wisely.
Responsible credit card usage means maintaining a low utilization ratio by spending within your means and making monthly payments on time. If you have trouble keeping track of your card activity, consider setting up balance updates or payment reminders.
Alternatives to cancelling your card
If you no longer want one of your credit cards but are unprepared for the potential impact on your credit score if you cancel the card, there are other options you can consider.
Ask the publisher for better conditions
Interest rates and annual fees aren’t always set in stone. Sometimes it’s possible to negotiate better terms with your credit card issuer. Consider asking your card issuer to match a competitor’s lower interest rate or to waive the card’s annual fee.
Upgrade a secured credit card
Secured credit cards are backed by cash deposits and can be helpful for people trying to repair their credit. Instead of closing the card once your credit improves, ask your card issuer to upgrade you to an unsecured credit card without closing the account.
Keep the card for small payments
If you have an unused credit card that you don’t want to cancel, consider keeping it in your wallet for occasional small purchases, like parking fees. Another option is to set up an automatic payment on the card for a recurring monthly bill, like a streaming subscription.
Use other strategies to avoid overspending
Closing a credit card isn’t the only way to stick to your monthly budget. Instead, try taking part in a no-spend challenge to pause your unnecessary spending or focus on using cash for payments instead of your credit cards.
Some people use card blocks to freeze their credit card accounts and prevent them from spending money.
it comes down to
Closing a credit card you no longer need or want isn’t necessarily a bad idea, and there are many situations where you may decide that canceling a card makes sense. However, consider how closing a credit card could harm your credit. If you’re concerned about your credit, take steps to minimize the impact of closing the account or explore alternatives to keeping the card active.
Frequently Asked Questions
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Can you close a credit card if you still have an outstanding balance?
Yes, it is possible to close a credit card with an outstanding balance, but you will still be responsible for paying back the money you borrowed.
Interest continues to accrue on the balance. If the card has an annual fee, you may have to continue paying it until the balance is paid off. The card issuer will send you monthly statements to keep you informed of the closed account balance and minimum payment.
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What happens to a credit card when you stop using it?
If you stop using a credit card altogether, the card issuer may close the account due to inactivity.
The amount of time it takes for a card to be considered inactive varies by issuer, but is usually a year or longer. If a card is canceled due to inactivity, it can affect your credit score in the same way as if you were to close the account yourself.
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Can you reopen a closed credit card?
You may be able to reopen your closed account if you change your mind, but that depends on the card issuer’s policies. The issuer may require a new hard credit check to make sure you still qualify for the card, which could cause a temporary drop in your credit score.
