The Impact of Closing a Credit Card on Your Credit Score

How Closing a Credit Card Can Affect Your Credit Score: What You Need to Know

'What to do with an old card' is a popular topic among cardholders upgrading or switching. Why maintain an outdated & unused card when you can acquire a better one? Canceling a credit card account may hurt your credit score, so keeping it current is best. Your credit will benefit from the extra work to handle an open, infrequent account. However, if you need to know what to do with your unused credit card accounts, your credit score may plummet, causing financial difficulty. Let's explore the pros and cons of closing a credit card. 

Key Highlights

  1. Your credit scores may suffer if you close a credit card. Credit utilization may increase when your credit limit decreases.
  2. It reduces the gap between spending and borrowing. 
  3. Cancelling a card may lower your account's average age. A brief credit history can affect your scores.
  4. It seems sensible to close a credit card sometimes. But first, consider other options and take precautions to safeguard your credit.

Does Closing a Credit Card Hurt Your Credit? 

Will closing a credit card lower your credit score? Credit card cancellations might hurt your score. Know how closing the card may affect your credit score before closing it.

The way you use your credit limits matters.

Canceling your highest-limit credit cards might hurt your credit score the most. Credit usage—the proportion of your credit limits—is your score's second—biggest element. Both total and per-card computations are done. Experts say that even people with excellent credit only use a fraction of their available credit.

Imagine you possess a $20,000 balance divided between 3 credit cards. One with a $5,000 limitation and the other with $10,000. If all three cards have $2,000 balances, your credit use is 10%. Cancelling the $10,000 card will return half of your credit limit. An increased spending of $2,000—or 20% of your available credit—will affect your credit score.

If you have credit, the older the better.

Your credit scores are also impacted by the age of your oldest account and the average age of your credit accounts, albeit not to the same extent as credit use. Your scores may suffer if you have a shorter credit history since lenders favor customers with a lengthy history of making their payments on time.

Using a different credit rating algorithm will have other effects on closed accounts. When determining the age of your accounts, the most popular algorithm, FICO, still considers both active and inactive accounts. VantageScore, a competitor of FICO, might not. Thus, shutting an account might decrease your VantageScores and the average age of your credit accounts.

Is it better to cancel unused credit cards or keep them? 

Now, let's understand whether canceling or keeping unused credit cards is better. Consider the pros and cons of closing a credit card.

When it's better to cancel unused credit cards

Closing a credit card has risks, but there are strong reasons. Credit cards can be canceled for the following reasons:

  1. You may need to catch up on payments or want to avoid accumulating unmanageable debt on your credit cards.

  2. You must terminate a joint credit account since you and your partner are divorcing.

  3. You can keep your retail credit card even if you stop shopping there.

  4. You want to avoid paying the annual charge since you no longer fly with your credit card issuer.

  5. Your premium credit card with a high annual fee is no longer suitable since your lifestyle and spending patterns have changed.

  6. The card has an excessively high-interest rate. You may want to switch to a card with a 0% intro APR offer because you need to pay off debt or make a big purchase that requires you to carry a balance.

  7. After receiving your college degree, you now qualify for a standard rewards credit card.

When it makes sense to keep an unused credit card

Will closing a credit card significantly harm your credit score? Maybe not, but it can be better. Credit cards shouldn't be canceled for these reasons:

  1. You don't want to risk your credit score falling into the fair credit area when it hovers just above the good credit level.

  2. You want to avoid losing credit score points to qualify for a mortgage.

  3. Using your oldest credit card could reduce the length of your credit history, which you want to avoid.

  4. Closing a credit card could shrink your available credit and hurt your credit usage ratio.

  5. You don't need to close it if you use your credit card less than your other cards.

How do I close my credit card without hurting my credit score? 

It may be tough when you think about closing a credit card account. Conversely, It will help you maintain a good credit score. 

1. Increase your amount of available credit.

Let's say your credit limit on another card you already have was increased. Even with a $5,000 credit limit from a closed card, your overall credit limit is $20,000. Since your usage ratio is nearly the same, your score should vary minimally.

Use caution while using this method since issuers may handle credit limit increase requests differently than new credit applications. You might have to consent to a hard credit inquiry to receive approval, lowering your credit score.  

2. Clear out your balances.

Paying down or clearing your bills should be your priority if you're worried about using all of your credit. Consider the potential for a high annual percentage rate (APR) that you can eventually manage. If paying interest is not required, there is no need to do so. 

3. Become an authorized user.

This can still be helpful even if it might impact your credit score differently than having an open trade line of your own. The principal cardholder must maintain excellent account standing for this method, and the issuer must notify the credit bureaus of this information. 

Final words

Credit card closure is a significant decision. Take your credit score into consideration. Before canceling your credit card, you should weigh the benefits and drawbacks. Do you fear cancelling a credit card would hurt your credit?  

Try swapping it for another card from the same issuer instead! Close one card, use the rest responsibly, and keep your credit history positive. Are the gains worth the pain of damaging your score? After you understand this, it will determine your choices based on your goals and finances.

FAQs

Will closing a credit card lower your credit score?

Closing an account may influence your credit score. Nonetheless, the precise effect will vary based on how long you've opened the account and how many other accounts you own. There may be times when a minor influence reduces your score.

How many credit cards should I hold?

Well, there is no exact amount for holding credit cards. So, you can manage as many credit cards as you are comfortable with. To avoid paying interest, use wise spending and pay off your credit card in full each month.

What are the ways to improve my credit score?

You can improve your credit score by using:

  1. Secured credit cards
  2. Personal loans
  3. Auto loans
  4. Mortgages
  5. Credit builder loans

Why is it required to maintain a high credit score?

Lenders can gauge your reliability in repaying loans using a credit score. Poor credit scores indicate high-risk borrowing, reducing your chances of credit approval. If accepted, borrowing money with bad credit may come with higher interest rates.

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  1. Credit Cards vs Debit Cards

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  3. What if you pay a minimum payment on your credit card

11 Dec, 2023

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