Are you saying goodbye to a credit card? Sometimes it’s for the best, especially if the card carries unwanted fees or you just don’t need those frequent flier miles these days. But how does closing a credit card affect your credit score?
As a general rule, closing a credit card can negatively impact your credit history. But it’s important to understand how much and situations where closing your card still makes sense.
How Does Closing a Credit Card Affect Your Credit?
Your payment history is one of the main factors that contribute to your credit score. But even if you maintain a credit card with a $0 balance, closing the account can damage your credit. The reasons are somewhat complex but have to do with your:
- credit utilization ratio,
- your account history,
- and your credit mix.
Here’s how these factors can impact your score after closing a credit card.
1. Credit Utilization Ratio
Your credit utilization ratio describes how much of your available credit you’re currently using. This is done on a per-card as well as an aggregate basis and accounts for about 30% of your FICO® score.
Ideally, you’ll want to keep your credit utilization ratio at 30% or less. In fact, the lower you keep this figure, the better it will be for your credit.
When you close a credit card, you lower your aggregate credit ratio.
Imagine that you have four credit cards, each with a credit limit of $10,000. That means your aggregate credit limit amounts to $40,000.
If your total credit balance adds up to $10,000, your credit utilization ratio comes to 25% ($10,000/$40,000).
But look what happens when you close just one of those cards: your total credit limit drops to just $30,000.
If you maintain the same account balance as before ($10,000), your new credit utilization ratio comes to 33%. That’s enough to bring down your credit score.
2. Length of Credit History
The length of your credit history is less complex and accounts for roughly 15% of your FICO® credit score. The longer your total credit history, the lower the impact on your credit score.
If you close a credit card you’ve recently opened, it’s unlikely to affect your credit score significantly. But chances are that you’re closing a credit card you’ve had open for a while, even if it’s just been sitting idle. If you close this card, you’ll decrease the average age of your credit card accounts, and doing so can contribute to a lower credit score.
3. Credit Mix
You might not think much about your credit mix, but it accounts for as much as 10% of your FICO® personal credit score. Your credit mix refers to the number of diverse sources of credit, which can include credit cards but also extend to things like personal loans or other lines of credit.
By closing a credit card, you could disrupt the diversity of your credit mix, which could alter your credit score. The exact degree depends on how many other sources of credit you have in addition to your closed account. If you only have a few credit cards, closing one of those cards could reduce your credit score.
How Much Does Closing a Credit Card Hurt Your Credit Score?
Because of these factors, closing a credit card can lead to a significant drop in your credit score. But just how badly does closing a credit card hurt your credit? The short answer is “It depends”.
As you probably know, your personal credit score falls between 300 and 850, with higher numbers indicating strong credit. While multiple credit bureaus can calculate your score, FICO® has long been the standard.
FICO’s official formula for calculating consumer credit is a closely guarded secret, but your financial data is generally weighed as follows:
- Payment history (35% of your score)
- Credit utilization ratio (30% of your score)
- Length of credit history (15% of your score)
- Credit mix (10% of your score)
- New credit (10% of your score)
This means that the exact impact on your credit score will depend on how closing a credit card affects each of the above factors, particularly in the ways outlined above.
For example, if you only have a few credit cards, closing one of them can drastically impact your credit utilization ratio and lower your total credit history. In this scenario, closing a credit card would cause more damage than having a larger number of credit cards or a diverse credit mix.
How long will your credit score be affected? 📅
Closing your credit card will remain on your credit history for seven years. It’s possible to improve your score during that time, though it will remain on your report.
Reasons to Consider Closing Your Credit Card
Does this mean you should avoid closing your credit cards? Not necessarily. There may be good reasons to consider closing a credit card, such as:
- High annual fees.
- High interest rates.
- Trouble controlling your spending.
- Divorce or separation from your partner.
Just be aware that even under the best circumstances, closing your credit card will affect your credit score.
How to Safely Close Your Credit Card
If you choose to close a credit card, the safest way to do so is to follow these steps:
- Pay off all of your credit cards to keep your credit utilization ratio low.
- Redeem any unused credit card rewards.
- Close your account via a certified letter.
- Request written confirmation that your balance is $0.
- Check your credit report 30–45 days after closing to confirm.
As always, dispute any incorrect information with the credit bureau immediately, as this will ensure that you address errors that could artificially lower your credit score.
Alternatives to Closing Your Credit Card
There are alternatives to simply canceling your credit cards that won’t bring down your credit score. They include:
- Keeping the card but not using it
- Negotiating with the issuer for lower interest rates
- Upgrading (or downgrading) to a fee-free credit card
- Using a budget app to control your spending
If you’re struggling to manage the balance on your credit card, you could try a balance transfer card that will help you pay off this debt at a lower interest rate. Some providers offer 0% introductory rates as long as you make on-time payments, which can allow you to pay down your debt and work toward improving your credit score.
The Importance of Financial Literacy
It may seem counter-intuitive, but even if you close a credit card with a $0 balance, it can bring down your credit score. Knowing exactly why can help you close the card safely, but it also helps to seek out the alternatives listed above.
Knowing your options will both help you in the short term and improve your financial literacy, which will serve you throughout your lifetime.