Keeping credit cards that you no longer want or need may seem like a waste of space in your wallet, but closing credit cards, even those that you don’t use, can affect your credit. This doesn’t mean that you should keep all your cards forever, but you should be cautious about which accounts you close and when you do it.
How can closing affect your credit?
Closing a credit card can affect your credit in several key ways, and unfortunately, the impact is usually negative.
First, it can increase your credit utilization rate. When you close a credit card, especially if you have a balance on it, the credit limit no longer counts towards your credit, so your utilization ratio can rise immediately. The credit utilization ratio measures how much of your total available credit you are using. It depends on your overall available credit across all cards and also on a single credit card’s basis. If you lose some available credit but still carry the same amount of debt, your ratio will increase. Since credit utilization makes up 30% of your credit score, this is an important factor to monitor.
Note: Even closing a credit card with a zero balance can affect your overall credit utilization if you have balances on your other credit cards.
Second, your “credit age” may decrease. Well-managed closed accounts will stay on your credit report for up to 10 years, so it may take some time for that to affect you. Eventually, the credit card will disappear from your credit report as it’s no longer active. If you are closing your oldest account, your credit score may drop after 10 years when that account is removed from your credit report. When closing a credit card account, you should consider accounts with shorter credit histories, also taking into account the impact of having a lower credit limit on your credit utilization today and in the future.
Third, you will have one less open account on your credit report. If you don’t have many credit cards or other loans, this could leave you with a thin credit file, meaning there isn’t enough information for lenders to assess you.
Note: Closing a credit card does not remove it from your credit report. Any negative payment history associated with the account will be reported for seven years from the date of the delinquency.
Your credit mix may be affected. Credit mix makes up 10% of your credit score. Showing that you can handle different types of credit can help enhance your credit. If you close your only credit card, it may make you appear less experienced in managing different types of credit accounts.
It doesn’t matter who closed the credit card – whether it was you or the card issuing bank. The impact on your credit is the same.
When is it acceptable to close a credit card?
In some cases, closing a credit card may be the best decision for your credit and finances. You may close a credit card that has become more expensive than it’s worth. This can happen when annual fees increase, or reward programs are not as profitable as they once were. A high annual percentage rate (APR) could also be a triggering factor to close a credit card. You should consider that you can avoid the cost of a high-interest rate by taking advantage of the grace period and paying off your balance in full each month to avoid financing charges on your balance.
If
If you’ve been trying to eliminate debt but can’t resist the urge to spend, closing your credit card may be worth any temporary damage to your credit. Otherwise, it can hinder your progress in paying off debt by continuing to accumulate purchases.
Finally, you may consider closing your secured credit card or store credit card that you used to start or rebuild your credit. These may have been great options at certain points, but once you’re eligible for better credit cards – with rewards programs or lower interest rates – it’s acceptable to let go of older credit cards that no longer serve you.
Alternatives to Closing Your Card
Closing your credit card is not the only action you can take, especially considering the potential damage to your credit.
Make sure to keep your oldest credit cards and those with the highest credit limits. This step will reduce the impact on your credit history length and your credit utilization ratio.
If you’re holding onto a credit card that you don’t use much and are looking for ways to make it more useful, consider switching to another credit card from the same issuing bank. Check their current offers to see if there’s a similar credit card that might be a better fit for you. Some banks allow you to change credit card accounts or “product change” without affecting your credit history, but you likely won’t be able to take advantage of new customer signup offers if you change credit card products with the same issuing bank.
If the credit card you want to cancel has a high-interest rate, consider transferring the balance to another card with a lower interest rate. You’ll be able to keep your card and pay off the balance at a lower rate. Make sure to maintain the old credit card by making a small purchase each month and then paying it off in full.
Finally, if you’re struggling to resist the urge to spend, you can set your credit card aside or at least cut it up until you’ve paid off your debts.
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Sources:
MyFICO.com. “What’s in Your Credit Score?”
MyFICO.com. “How Credit Limit Decreases Can Affect Your Score.”
Source: https://www.thebalancemoney.com/how-closing-credit-cards-affect-your-credit-score-960496
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