Closing a credit card can hurt your credit score, but does that mean you have to leave credit cards open forever to protect your credit score? If you're trying to keep your credit score in good standing, you'll want to be careful about which credit cards you keep open and which you close.
Considerations for Each Type of Credit Card
You may have a few different types of credit cards. These can include those from hope improvement and furniture stores, merchant cards, gasoline cards, and major credit cards. Closing each type of card should be approached differently.
New or First Credit Card
If you’ve just started using credit and recently got your first credit card, it's best to keep that card open for at least six months. That's the minimum amount of time for you to build a credit history to calculate a credit score. Keep your first credit card open at least until you get another credit card.
Rewards Back Cards
Closing your rewards credit card may cause you to forfeit rewards you haven't used yet. If you racked up a nice signup bonus or you’ve accumulated rewards over the past several months, keep your credit card open long enough to use your rewards.
You may be able to transfer your rewards to another program. Check the terms of your rewards program to learn whether you can transfer your rewards.
Unused Credit Accounts
Unused credit cards carry a risk of fraud. If you aren't using the credit card, it may take you longer to detect fraudulent charges. Plus, your credit card issuer may deactivate or cancel your credit card if you don't use it for several months. Use your credit cards periodically and always read your billing statements, even if you think you have a zero balance.
Secured or Other Cards for Bad Credit
Rebuilding a bad credit history sometimes means accepting credit cards with high-interest rates, low credit limits, annual fees, or security deposit requirements. While these credit cards are great for proving that you’ve rehabilitated your bad credit habits, they’re not keepers. You can close one of these "starter" credit cards as soon as you're able to qualify for something better. When you're building or rebuilding your credit score, aim to qualify for better and better credit cards.
Low Limit Cards
Credit cards with low credit limit are also candidates for closing, especially if you have other credit cards with higher credit limits. It's not that the low limit credit cards are hurting your credit score, just that these credit cards with low limits aren’t benefiting you.
It's likely that your low limit credit cards are store credit cards with high-interest rates and aren’t the most attractive credit cards in the first place. Plus, the low credit limit only allows you to charge a small amount before the credit utilization is too high.
After a Late Payment
While you’ll be charged a late fee if your payment isn’t received by the due date, the credit bureaus aren’t notified until your payment is at least 30 days past due. Two late payments, however, can lead to an interest rate increase that will last a minimum of six months. If your credit card terms allow the credit card issuer to leave the penalty rate in effect indefinitely, you may consider paying off the balance and closing the credit card.
Closing your credit card doesn’t erase the credit history from your credit report. The late payments will still be reported for the seven-year credit reporting time limit.
Credit Score Impact
Deciding not to keep a credit card open can impact your credit score, especially if your credit card had a nice amount of available credit. Your credit score benefits from low credit utilization: when the ratio of your credit card balances to their credit limit is low.
A credit card with a high limit helps your credit score the most when some of your other credit cards have balances; the available credit on one credit card lowers your overall credit utilization. But if all your credit card balances are low, i.e., below 30% of the credit limit, closing one card shouldn’t hurt your score too much.
Reviewing Your Credit Cards
Keeping your credit cards open won’t hurt your credit score. Review all your credit cards periodically to compare the terms on each. You may consider keeping those with low-interest rates, high credit limits, or the best rewards program and closing the rest.