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How Does Closing a Credit Card Affect your Credit Score?

September 30, 2022 by Daniel Azzoli

Person closing a credit card on their computer.

Credit cards can sometimes be a bit of a double-edged sword. On one hand, they can be a useful tool to have in your financial toolbelt if used responsibly. On the other hand, if you’re not careful, they can do damage to your financial standing.

So, with this in mind, it’s important to have a good understanding of how credit cards work, how to manage your accounts, and how to use them responsibly. Some key aspects to keep in mind may be a bit more obvious, like not spending more than you can afford to pay off and not paying your bills late. Having said that, some important aspects of responsible credit card management may be a little more nuanced.

This brings us to the main question we want to explore today – does closing a credit card hurt your credit score? The simple answer is that it can, but how? And why? We’re going to take a closer look at how closing a credit card can affect your credit score, and more.

Before we begin, we’d also like to point out that your credit score is impacted by various factors and the effects of closing a credit card could vary from one person to the other.

What is my Credit Utilization Ratio and How Does my Credit Card Affect it?

For any revolving credit account that you have, like a credit card, you’ll have a credit limit that you can borrow from. Whenever you use your credit  card to buy something, you’ll be using up some of your available credit. Your credit utilization ratio is the total amount of credit you’ve used across all your revolving credit accounts compared to the total amount of available credit you have. So, for example, if you have one line of credit and one credit card, both with a credit limit of $3,000, the total amount of credit you have access to is $6,000. If you’ve used $2,000 on your credit card and $1,000 on your line of credit, your credit utilization ratio would be 50%.

Person looking at computer considering closing credit card account.

Why is this number important? Well, your credit utilization ratio is one factor that’s used to calculate your credit score. This makes it an important part of your financial profile. Generally, it’s recommended that you keep this number at or below 30%.

So, does closing a credit card hurt your credit score? Let’s look at a different example this time. Let’s say you have two credit cards, and both of those cards have a limit of $2,000, bringing your total amount of available credit to $4,000. Each month, you use about $1200 across both credit cards, which would put your credit utilization ratio at 30%. If you decide to cancel one of those cards but are still using the same amount of credit each month, that doubles your utilization ratio, which can impact your credit score. This is something you should be aware of and as mentioned previously, the impact can vary from one person to the other depending on various factors, including the different types of revolving credit accounts you have.

Should I Cancel a Credit Card with an Annual Fee?

The answer to this question is going to depend on your personal situation, but if you have a card that you don’t really use and it carries an annual fee, you might want to think about cancelling that card. There may be a small hit to your credit score, but you also won’t be needlessly paying annual fees on a card you don’t use.

You might also be hesitant to cancel a credit card because of whatever rewards a particular card offers. If those rewards outweigh the annual fees that you’re being charged, that’s one thing. But it’s worth going through the exercise of determining the worth of the rewards if keeping that card is costing you.

Should I Cancel my Credit Card if I Can’t Control my Spending?

While closing a credit card may have an impact on your credit score, the implications of not closing it can be a whole lot more severe in certain circumstances. One of the most important aspects of responsible credit card use is not overspending. So, if you’re making purchases you can’t afford on your credit card, it might be a good idea to close that account instead of digging yourself into a deeper hole of debt.

Having said that, your credit card is a useful financial tool to have at your disposal for all sorts of reasons, so before you cancel your card, it’s worth trying to find ways to reduce your credit card use. Cancelling all your accounts should be seen as a last resort instead of a solution to overspending.

Should I Cancel my Credit Card if my Account is Compromised?

If you see any purchases start to pop up on your credit card statement that you don’t remember making, or you feel like you might be a victim of identity theft, taking a small hit to your credit score would be a tiny problem compared to what you might be facing.

In either case, you’re going to want to reach out to your credit card provider immediately and inform them of what’s happening. They’ll likely cancel the account right away and send you a new card.

Person typing credit card number into their phone.

Whether you go through a situation like we just outlined or not, it’s a good idea to regularly check in on your credit report to see if there are any fraudulent marks. You can go to annualcreditreport.com to get a copy of your credit report for free, and you’re entitled to a free report once a year from each major credit bureau (Equifax, Experian, TransUnion). If you do spot any errors, let them know immediately.

How Should I go About Closing a Credit Card?

If, for whatever reason, you feel like it’s best for you to close a particular credit card, you’ll want to make sure you do it in a way that’ll impact your financial standing the least.

One of the key components to think about is the timing of when you close your account. Depending on what your financial goals are, there may be some moments in which you wouldn’t want your credit score to get affected if you close certain credit card accounts. Try being mindful of that and think about your credit report holistically – meaning, don’t forget to take account of all your revolving credit accounts.

Another thing to keep in mind is that if you’ve been building up rewards of any kind on the card you’re thinking of cancelling, try to use these up before you close your account. So, if you have $100 in cashback rewards, spend them!

The last thing to keep in mind is that before you close an account, you should try to pay off the entire balance first. While your credit score may drop a bit from the cancellation, it may drop even more if you have unresolved debt on that account. This is because a closed account will still remain on your credit report for a number of years.

Are There Other Ways that Credit Cards can Affect my Credit Score?

Your credit cards can affect your credit scores in more ways than the impact they make on your credit utilization ratio. One of the biggest ways is the role they play in your payment history.

When you make payments on your credit cards, these payments will typically be reported to a credit bureau. The same applies if you miss payments. If you always make these payments on time, or if you start to miss payments, there can be an impact on your score.

Person looking at credit card contract.

Two other key areas that help to make up your credit score are credit mix and the overall length of your credit history. Generally, the longer history you have of using credit responsibly, the better. So, if you’re thinking of closing a credit card that happens to be your first credit account, it may impact your score, as it could affect the average age of all your accounts. Although, like we said earlier, closed accounts remain on your report even after they’re closed.

That being said, and as mentioned earlier, your credit score is impacted by all the different kinds of credit accounts you have.

Consider your Situation Carefully Before Closing a Credit Card

In the end, your credit cards can impact your credit score in all sorts of ways. While closing a credit card could potentially lower your score in the short term, it may be something you would want to consider doing depending on your situation. Take the time to assess your standing, learn as much as you can on the impact of your actions, and try to make the best decision for your financial situation!


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