Holding on to credit cards you no longer want or need may seem like a waste of space in your wallet, but closing credit cards, even those you don’t use, can affect your credit score. That doesn’t mean you have to keep all your cards forever, but you should be cautious about which credit card accounts you shut down and when.
How Closing a Card Can Hurt Your Credit
Any credit card that’s reported to the credit bureaus is factored into your credit score. That means how you handle the card plays a role in how your credit score moves. Closing a credit card can affect your credit score in a few key ways, and unfortunately the impact is rarely positive.
Your credit utilization rate can go up. When you close a credit card, particularly one that has a balance, the credit limit is no longer factored into your credit score, so your credit utilization ratio can shoot up immediately. Your credit utilization ratio measures how much of your total available credit you’re using. Credit utilization is based on overall credit available used across all cards and also on a per-credit card basis. If you lose some available credit but carry the same amount of debt, your ratio will go up. Because utilization makes up 30% of your score, this is an important factor to watch.
Even closing a credit card with a zero balance can affect your overall credit utilization if you’re carrying balances on your other credit cards.
Your credit “age” might go down. Accounts closed in good standing will be included in your credit report for up to 10 years, so it might take a while for that to affect you. Eventually, the credit card will drop off your credit report, because it’s no longer active. If you’re closing your oldest account, your credit score might drop 10 years from now when that account falls off your credit report. When closing a credit card account, you should consider accounts with the shortest credit age, while also weighing the impact of having a lower overall credit limit on your credit utilization today and in the future.
You’ll have one fewer open account on your credit report. If you don’t have many other credit cards or loans, this could leave you with a thin credit file, meaning that there’s not enough information for a creditor to evaluate.
Closing a credit card doesn’t 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 is 10% of your score. Demonstrating that you can handle various types of credit helps to boost your credit score. If you close your only credit card, it could make you look less experienced at handling different kinds of credit accounts.
It doesn’t matter who closed the credit card—you or the card issuer. The impact to your credit score is the same.
When It’s OK to Close a Credit Card
Sometimes closing a credit card may be the best decision for your credit and your finances. You might close a credit card that’s become more expensive than it’s worth. That can happen when the annual fee increases, or the rewards program isn’t as lucrative as it once was. A high annual percentage rate (APR) could also be a motivating factor for closing a credit card. Keep in mind that you can avoid the cost of a high interest rate by taking advantage of the grace period and paying your balance in full each month to avoid paying finance charges on your balance.
If you’re trying to get out of debt, and you can’t resist the temptation to spend, closing a credit card is worth any temporary damage to your credit score. Otherwise, you could derail your debt-payoff progress by continuing to rack up charges.
Finally, you might close a secured credit card or a store credit card you used to jumpstart or rebuild your credit. These might have been great options at certain points, but as you qualify for better credit cards—with rewards programs or lower interest rates—it’s OK to let go of old credit cards that no longer benefit you.
Alternatives to Closing Your Card
Closing your credit card isn’t the only measure you can take, especially considering the potential damage to your credit score.
Keep in mind the two credit cards you may want to keep around: your oldest and the one with the highest credit limit. These will limit the damage to the length of your credit history and your credit utilization ratio.
If you’re keeping a credit card you don’t use much but are looking for some ways to make it more beneficial, consider switching to another credit card from the same credit card issuer. Take a look through their current offerings to see whether there’s a comparable credit card that would be a better fit for you. Some issuers allow you to switch credit card accounts, or “change products,” without a detriment to your credit history, but you likely will not be able to take advantage of new-customer sign-up bonuses if you change credit card products with the same issuer.
If the credit card you want to cancel has a high interest rate, consider transferring the balance to another, lower-interest, card. You’ll be able to keep your card and pay off the balance at a lower rate. Keep the old credit card active by making a small purchase each month and then paying it off in full.
Finally, if you’re having trouble resisting the temptation to spend, you can put your credit card away—or cut it up—at least until you’re finished paying off your debt.