Choosing to close or cancel a credit card account may impact credit scores, depending on various factors. For example, closing a card can change your credit utilization ratio, credit history length or credit mix, which can all impact a credit score.
Disadvantages of Closing a Credit Card
How you handle your credit, including closing a credit card, can affect your credit score. Some of the most influential factors that comprise your credit score, after payment history, are credit utilization ratio, length of credit history and the different types of credit accounts you have.
1. Your Credit Utilization Ratio May Increase
Credit utilization ratio is the amount of available credit you have relative to your credit limits. If your credit utilization ratio exceeds 30%, your credit score may go down.
VantageScore considers credit utilization ratio to be a highly influential factor when calculating credit scores.
In general, lenders like to see credit utilization ratios of 30% or less because it can indicate that you know how to manage the amount of credit you have.
To calculate credit utilization ratio, imagine you have a card with a $5,000 limit and a $1,800 balance, and a card with a $3,000 limit and a $500 balance:
- Add up the amount of the credit limits. ($8,000)
- Then, add up the balances separately. ($2,300)
- Finally, divide the total balance by the total credit limit. In this case, total balance is $2,300 and total credit limit is $8,000, so your credit utilization ratio is around 28%, which is less than the recommended maximum of 30%.
If you were to pay off and close the credit card with the $3,000 credit limit, you could only use the card with the $5,000 limit in your calculation. Then, your credit utilization ratio would increase to 36%, which could negatively impact your credit score.
2. It Could Shorten the Length of Your Credit History
Under most credit scoring models, the length of your credit history is highly influential, but not all models deal with open and closed accounts in the same way.
For example, when calculating length of credit history, some scoring models may only average together open, active accounts and ignore closed accounts, which can shorten the length of your credit history. In that case, closing older credit cards can have a negative effect on the length of a person’s credit history.
Other scoring models average together both open and closed accounts, which does not shorten the length of your credit history.
Even so, all closed credit card accounts typically drop off credit reports after seven to 10 years from last activity. So if the credit scoring model includes closed accounts in length of credit history calculations, the drop-offs could shorten overall credit history length in the future.
3. It Could Decrease Your Credit Mix
Maintaining a healthy mix of different types of credit — revolving and installment — is considered a positive signal to the major credit scoring models. The types of credit, combined with the credit utilization ratio and the length of credit history, are all highly influential when it comes to how credit scores are calculated.
If you happen to close the only credit card you have, and have no other revolving credit accounts, your credit mix could decrease, which could have a negative impact on your credit score.
Advantages of Closing a Credit Card Account
It’s important to weigh your options before making the decision to close a credit card account. However, even if closing a credit card could temporarily impact your credit score, these benefits may be worth it.
1. Save money
If you find yourself using your credit card excessively and running up a card’s balance close to the limit, you could save money by closing the card. This is especially true if you can’t afford to pay off your charges each month, which means you’ll likely end up paying interest.
2. Streamline Your Finances
If you have a lot of other financial obligations, including other credit cards, managing payments can become tricky — one slip could result in a late fee. Closing credit accounts could help streamline your finances and allow you to feel less overwhelmed.
FAQs Regarding Credit Card Closures
Can you close credit card accounts with a balance?
Some creditors will allow you to close credit cards with a balance, but be aware that doing this could affect your credit utilization ratio.
When you close credit cards that carry a balance, creditors often report the credit limits as $0 because the accounts are closed to further charges. This can result in a decrease in your total credit limit across all your accounts. However, the total amount of debt you owe across all accounts will remain the same.
A decrease in total credit limit combined with the same amount of total debt you had before any closures could result in a credit utilization ratio increase and harm your score.
When should you consider closing credit card accounts?
Reasons you might consider closing credit card accounts include high annual fees that card rewards or benefits programs don’t offset. In addition, secured cards, which require a deposit and are designed for helping build credit, could be closed in favor of credit cards with better terms.
When should you consider keeping credit cards accounts open?
If you are planning to make a major purchase — home, auto — that would require a credit check within the next six months, you might want to consider waiting to close credit card accounts until after the purchase. Delaying credit card account closures could help you avoid a possible negative impact on your credit score.
What are some alternatives to closing credit card accounts?
If you don’t want to take a chance on having your credit score change, you could consider these other options:
- When you call to cancel credit cards, representatives may offer incentives to keep the accounts open. Incentives could include waiving the annual fee or lowering the card’s interest rate.
- For secured cards with good payment history, credit card issuers may offer to convert them to unsecured cards, which would not require closing the original credit cards.
- You could also request that your credit card issuer lower your cards’ limits if you are tempted to spend more than you should. Be aware, however, that lowering limits can increase credit utilization ratios.
Monitoring Your Credit After Closing a Credit Card
After closing a credit card, you’ll likely want to monitor your credit to see how the closure may have affected your credit score. If you’re not already using a product to monitor your credit, why not consider ScoreSense?
ScoreSense is a product that will provide you with all three of your credit reports and credit scores. Plus, you’ll receive daily monitoring, alerts, monthly updates, and credit insights to help you make sense of your scores. Are you ready to start monitoring your credit regularly? Let us know in the comments.