At some point in your financial journey, you may find yourself with a credit card that you no longer need or want. Perhaps the card has a high annual fee, you’ve replaced it with a better card, or you simply want to simplify your finances. The natural inclination is to close the account and move on. However, closing a credit card, even a paid-off one, can have an unexpected and potentially significant negative impact on your credit score. The key to closing a card without hurting your score is to be a strategic consumer who understands exactly how your credit score is calculated. This comprehensive guide will break down the two main reasons closing a card can hurt your score, provide a step-by-step guide to the right way to close an account, and help you determine when it’s actually a good idea to close a card.
The Two Main Reasons Closing a Card Can Hurt Your Score
Your credit score is a complex calculation based on several factors, and closing a credit card can negatively impact two of the most important ones.
The Impact on Your Credit Utilization Ratio (30% of your score)
Your credit utilization ratio is a measure of how much of your available credit you are using. It is calculated by dividing your total credit card balances by your total credit limits. Lenders prefer to see a low credit utilization ratio, ideally below 30%, as it signals that you are not over-relying on credit. When you close a credit card, you are reducing your total available credit, which will automatically increase your credit utilization ratio (assuming your balances remain the same). For example, if you have two cards, each with a $5,000 limit and a $1,000 balance, your total available credit is $10,000 and your total balance is $2,000, giving you a healthy 20% utilization. If you close one of those cards, your total available credit drops to $5,000, and your utilization instantly jumps to 40%, which can significantly harm your score.
The Impact on the Length of Your Credit History (15% of your score)
The length of your credit history is another important factor in your score. It considers the age of your oldest credit account and the average age of all your accounts. Lenders see a longer credit history as a sign of financial stability. When you close a credit card, especially an old one, you are effectively shortening your credit history. The older the card you close, the greater the potential negative impact on the average age of your accounts. This is why financial experts often advise against closing your oldest credit card, even if you no longer use it.
The Right Way to Close an Account
If you are determined to close a credit card, you need to do it the right way to minimize the potential damage to your score.
Paying Off the Balance in Full First
This is a non-negotiable step. You cannot close a credit card with an outstanding balance. You must pay off the balance in full before you initiate the process.
The Strategic Timing of Closing the Card
The best time to close a card is after you have a new card or a new loan in place. For example, if you are planning to apply for a mortgage in the next six months, it is a bad idea to close a credit card, as the potential negative impact on your score could affect your interest rate.
The Importance of the Card’s Age and Usefulness
Before closing a card, ask yourself:
- Is this my oldest card? If so, it’s often better to keep it open.
- Does the card have an annual fee? If it’s a card with a high annual fee and you are no longer using the benefits, closing it may be worth the potential short-term hit to your score.
- Is the card a source of temptation? If the card is causing you to go into debt, closing it may be the best move for your long-term financial health, regardless of the impact on your score.
Step-by-Step Guide to Closing a Card
Once you have made the decision, here is the step-by-step process for closing a credit card.
1. Contacting the Card Issuer
Call the customer service number on the back of your card. State clearly that you want to close your account and not just cancel the card. The representative may try to offer you a better deal or a retention bonus to keep you as a customer. If you are firm in your decision, politely decline and proceed with the closure.
2. Getting Written Confirmation
After the call, ask the representative to send you a written confirmation that the account has been closed. This is a crucial step that provides a record of the closure in case there are any future issues.
3. Monitoring Your Credit Report
After you have closed the card, it is important to monitor your credit report to ensure that the account has been reported as closed at your request and that the account is listed as being in good standing.
When It’s Actually a Good Idea to Close a Card
While closing a credit card can be risky, there are times when it is the right financial decision.
The Card Has a High, Unjustified Annual Fee
If you have a credit card with a high annual fee and you are no longer using the benefits that justify the cost, closing the card is a smart financial move. The money you save on the annual fee can be used for other financial goals.
The Card is a Source of Financial Temptation
If a credit card is a source of temptation and is causing you to go into debt, closing it is a great idea. The potential hit to your credit score is a small price to pay for your long-term financial health and peace of mind.
Final Conclusion: Be a Strategic Consumer
Closing a credit card is not a decision to be taken lightly. By understanding the two main reasons closing a card can hurt your score—the impact on your credit utilization and the length of your credit history—you can make an informed and strategic decision. The key is to be a strategic consumer who understands the nuances of credit scoring and makes decisions that are in the best interest of your long-term financial health, even if it means a small, temporary dip in your score.
