How Does Closing A Credit Card Affect Your Score?

What Happens When I Close a Credit Card?

One question that always pops up when people want to build credit scores is whether or not they should close their old credit cards they do not use. Let me make it clear: it is not a black-and-white question, and the answer to it depends on the circumstances. Specifically, closing a credit card is usually a negative factor that can hurt the credit score, at least in the short run. Now let’s dissect this a bit further.

The Main Ways Closing A Credit Card Can Impact Your Credit Score

There are a few key ways that closing a credit card account can alter your credit score.

1. Reduces Total Available Credit First of all, paying off credit cards stops the revolving line of credit in general from the closed account. This, in turn, raises your credit utilization rate —the amount of credit you are currently using relative to your total credit limit. For instance, if you have $1000 in balances and $5000 in credit limits, then your credit utilization rate would be 20%. If the card has a limit of $2000, then your available credit decreases to $3000 and your utilization increases to about 33%. A major factor that reduces credit scores is the high credit utilization ratio. Ideally, utilization should be kept to a minimum; generally no more than 30%.
2. Alters Credit Mix The combination of various accounts in the credit report also affects the scores of the credit report. This mix component can be enhanced by having both revolving credit (as used in credit cards) and installment credit (mortgages, student, and auto loans). If you cut your only credit card, you are doing something that decreases your mix of credit. However, generally mix remains a minor component.
3. Effect on Length of Credit History Another factor that determines credit scores is the length of credit history. If you shut down your credit card that is the oldest, the average age of your credit history will be lower and this may help pull down your scores slightly. For instance, if the card on which you had been using the credit for 15 years is closed, but you still have some accounts active for 5 years, your average age plummets as soon as the old account is no longer reported.
4. Fewer Accounts Some credit scoring models also prefer several open credit card accounts to be active and well-maintained by the applicant. Therefore if closing a card does reduce an overall number of active accounts then that also must slightly affect scores. However, it is usually not a significant problem in comparison with utilization and history length factors.

Now, the severity of each of these impacts is relatively small for most people with healthy credit profiles and histories. And in the long term, their credit scores tend to recover after a slight decline immediately after the closure. However, those who have lower credit, short credit history, and a minimum credit file balance can expect further reductions.

When closing an account makes sense In some situations, despite the short-term score hit, closing a credit card still makes strategic sense.

If it has an annual fee If a rarely used card has an unusually steep annual fee that does not justify the card’s benefits or features, a closure is advisable. Maintaining an account open to have credit available is not necessary especially when one has to pay numerous fees continually. As it has a good overall history, the temporary score dip should level up soon enough.

When Reducing Spending Temptation Those struggling to cut down overspending or credit card spending should eliminate such accounts as an old retail card that one cannot resist using due to the high limit. In this case, unhealthy financial behaviors are corrected and score issues are the last of one’s concerns.

If the Account is Compromised Last but not least, if a card is hacked or involved in fraudulent activities, it is wiser to have it closed down especially if the provider is not willing to offer any assistance. Hence, confidentiality of identity has to be preserved at all costs. And once again, with a healthy history, the credit score effect should not be significant.

How Soon Do Credit Scores Recover After A Closure Now, it is necessary to consider how long the negative effect of account closure lasts in the company’s performance indicators. Now, let’s analyze how long it takes for the account closure to hurt the company’s performance indicators. It depends on the total credit picture and record – people with very long credit history usually manage to recover faster. Nonetheless, for most of the prime borrowers, the primary impact on credit scores is not even fully recoverable in a year after the closure.

For instance, a common prime borrower with a solid credit history and less than a 30% credit utilization likely will experience a score decrease by 10 to 30 points shortly after the closure of a previous old card. However, in a few months, subsequent on-time payments and wise successive card usage usually get the scores back in the higher range. The most lasting effect may be the total credit limit reduction if a person frequently uses their credit card and accumulates a high balance—but even this is reversible in the future by further cutting balances on other accounts.

In sum, closing a credit card does generally hurt one’s scores a little for a while as a result of the combinatorial factors above, though this response to closing credit cards is not especially lasting or severe for steady borrowers. And for those with poor credit or without much reason to apply for new credit shortly, it is arguably even less beneficial to have a lasting impact.

Precautions to be taken before and after closure to protect the scores

If you do opt to close an old credit card account, there are precautionary steps you can take to minimize score damage both before and after.

• First of all, it is desirable to refrain from shutting the oldest active credit account if possible, as this contributes to the preservation of credit history length to a greater extent.
• Secondly, limit balances in cards before closure which minimizes the effects of total limits on utilization. It is advisable to pay down balances at least six months in advance if possible.
• Upon closure, commit to paying down revolving balances more quickly to maintain utilization in that 30% optimal range.
• Besides, it may be advisable to request issuers to switch you to better, or no annual-fee, cards instead of closure as well—this maintains a positive account record.
• To ensure all the remaining cards are active, one needs to interchange card usage each month. Or small recurring fees you have configured to be charged every month.
• Lastly, track score changes over 6 to 12 months through your credit monitoring service for your long-term bounce back.

The Last Word Most of the time, the negative effects of closing a credit card that is not often used or one that charges an annual fee are not much of a problem in most normal circumstances as long as the person has a healthy credit history and as long as he or she practices good card use and waits for some months for the scores to level out again. The short-term decline in score is inconvenient but temporary. However, as always, when deciding on major personal finance decisions, such as account closures, it is useful to verify such results using credit monitoring services before acting as some individuals with very thin, damaged, or limited credit histories could observe considerably more significant impacts on a score.

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