Closing a credit card might seem like a simple decision, but the financial consequences could linger for years in your credit history and overall financial health.
At a Glance
- Canceling a credit card can increase your credit utilization ratio and potentially lower your credit score
- Closing older accounts reduces the average age of your credit history, negatively impacting your score
- Consider keeping cards with no annual fees, unique benefits, or if you’re planning to apply for a mortgage soon
- Before canceling, pay off balances, redeem rewards, and evaluate how it fits into your overall financial strategy
How Closing a Card Affects Your Credit Score
When you close a credit card, two major factors of your credit score can be immediately affected. First, your credit utilization ratio—the percentage of available credit you’re using—will likely increase. Credit scoring models favor lower utilization ratios, typically recommending keeping it below 30%. If you close a card with a high credit limit but maintain balances on other cards, your overall utilization percentage rises, potentially lowering your score.
“Closing a credit card might hurt your credit score because removing a portion of your available credit will cause your credit utilization, a key credit scoring factor, to rise,” according to NerdWallet.
The second factor is your credit history length. Closing older accounts can significantly reduce the average age of your credit accounts, especially if the card you’re considering closing is one of your oldest. Credit scoring models reward longer credit histories, viewing them as indicators of reliability. This impact can be particularly pronounced for those with limited credit histories.
“The impact is likely to be greatest if you are relatively new to credit or have few credit accounts, which is called a ‘thin file,'” notes NerdWallet.
When to Keep an Unused Credit Card
There are several scenarios where keeping an unused credit card might be the wiser financial choice. If you’re planning to apply for a mortgage or other significant loan in the near future, maintaining your current credit score is crucial. Lenders scrutinize credit scores carefully during the approval process, and even a small dip could result in less favorable terms or higher interest rates.
Cards with no annual fees are generally worth keeping since they contribute positively to your credit profile without costing you money. Similarly, if a card offers unique benefits or features that are no longer available to new applicants, you might want to reconsider closing it. Some cards provide valuable perks like extended warranties, purchase protection, or specialized rewards programs that could prove useful in the future.
“Having good credit helps ensure you can secure loans, mortgages and credit cards with lower rates and favorable terms,” according to Bankrate.
When Closing a Card Makes Sense
Despite the potential negative impact on your credit score, there are legitimate reasons to close a credit card. High annual fees that outweigh the card’s benefits create an unnecessary financial burden. If managing multiple accounts becomes overwhelming or leads to missed payments, simplifying your financial life by closing unused cards could prevent costlier mistakes. And for those who struggle with overspending, removing the temptation of available credit might be worth a temporary dip in credit score.
For some, divorce or separation necessitates closing joint accounts to prevent financial entanglements. Others might find that store cards for retailers they no longer patronize simply take up space in their wallet and mental bandwidth. Poor customer service experiences can also justify closing an account, particularly if the frustration outweighs the card’s benefits.
Alternatives to Canceling
Before deciding to close a card, consider alternatives that might preserve your credit score while addressing your concerns. For cards with annual fees, contact the issuer to request a product change to a no-fee version of the card. This allows you to maintain the account’s history while eliminating the annual cost. Some issuers may also be willing to waive fees or offer incentives to keep your account active.
“Once you’ve shown you consistently pay on time, some issuers will allow you to ‘graduate’ to an unsecured card with better terms,” explains NerdWallet.
Another strategy is to keep the card active with minimal use. Setting up a small recurring charge, such as a monthly subscription service, and enabling automatic payments ensures the account remains open without requiring active management. This approach preserves the positive effects of the account on your credit history while minimizing the mental overhead of managing another card.
Steps to Close a Card Properly
If you’ve decided closing the card is the right move, following proper procedures minimizes potential negative consequences. First, pay off any remaining balance and redeem any accumulated rewards or cashback. Next, transfer any recurring charges to another payment method to avoid missed payments or denied transactions. Contact the card issuer directly—calling the number on the back of your card—to request closure of the account.
During this conversation, explicitly ask for written confirmation that the account was closed at your request and that the balance was zero. This documentation could prove valuable if discrepancies appear on your credit report later. Finally, destroy the physical card by cutting it into pieces, ensuring the account number, expiration date, and security code are all separated. Monitor your credit reports in the following months to verify the account shows as “closed by consumer” rather than “closed by creditor.”
“The ‘right’ number of credit cards varies from one person to the next,” notes Bankrate. The decision to keep or close a credit card ultimately depends on your unique financial situation, goals, and preferences.
