Will Closing Credit Cards Affect Credit Score?

Closing credit cards can indeed impact your credit score, and the extent of that impact depends on several factors. Understanding these nuances is crucial for making informed financial decisions that protect your creditworthiness. This guide breaks down exactly how closing a card affects your score and what you can do.

Understanding How Credit Scores Are Calculated

Before diving into the specifics of closing credit cards, it's essential to grasp the fundamental components that contribute to your credit score. The most widely used scoring models, like FICO and VantageScore, consider several key factors. While the exact weighting can vary slightly, the general principles remain consistent. Understanding these pillars will illuminate why closing a credit card can have a ripple effect on your overall credit health.

Payment History (Approximately 35% of Score)

This is the most critical factor. It reflects whether you pay your bills on time. Late payments, defaults, bankruptcies, and collections all significantly damage your payment history and, consequently, your credit score. Conversely, a consistent record of on-time payments builds a strong foundation for a good score.

Amounts Owed (Credit Utilization Ratio) (Approximately 30% of Score)

This factor measures how much of your available credit you are currently using. It's often referred to as the credit utilization ratio (CUR). A lower CUR generally indicates to lenders that you are not overextended and are managing your credit responsibly. We will delve deeper into this crucial metric later.

Length of Credit History (Approximately 15% of Score)

The longer you've had credit accounts open and in good standing, the more information lenders have to assess your borrowing behavior. A longer credit history, especially one with a positive track record, suggests stability and experience in managing credit over time. This includes the age of your oldest account, the age of your newest account, and the average age of all your accounts.

Credit Mix (New Credit) (Approximately 10% of Score)

This refers to the variety of credit you have, such as credit cards, installment loans (like mortgages or auto loans), and personal loans. Having a mix of different credit types can demonstrate that you can manage various forms of debt responsibly. However, this factor is less impactful than payment history or credit utilization.

New Credit (Approximately 10% of Score)

This category looks at how many new credit accounts you've recently opened and how many hard inquiries you have on your credit report. Opening too many new accounts in a short period can signal to lenders that you might be in financial distress or are taking on excessive debt. Each application for credit typically results in a hard inquiry, which can slightly lower your score temporarily.

The Direct Impact: How Closing Credit Cards Affects Your Score

Closing a credit card is not a simple deletion from your credit report; it can trigger a chain of events that influence your credit score in several ways. The severity of this impact hinges on which of the scoring factors mentioned above are most affected by the closure. It's rarely a single, immediate drop, but rather a gradual shift influenced by ongoing credit management.

Immediate vs. Long-Term Effects

The immediate impact of closing a credit card might not be drastic, especially if you have other credit accounts in good standing. However, the long-term effects can be more significant. For instance, closing a card can reduce your overall available credit, which directly impacts your credit utilization ratio. It can also shorten the average age of your credit accounts, affecting the length of your credit history.

Different Types of Cards, Different Impacts

The type of card you close also matters. Closing a store credit card with a small limit might have a minimal effect compared to closing a primary rewards card with a high credit limit that you've held for many years. The latter often plays a more substantial role in your credit utilization and credit history length.

The Role of Your Overall Credit Profile

Your existing credit profile is the ultimate determinant of how closing a card will affect you. If you have a robust credit history, multiple other credit cards with low balances, and a strong payment record, closing one card might barely register. However, if you rely heavily on that one card, or if it's your oldest account, the impact could be more pronounced.

Credit Utilization Ratio: The Biggest Culprit

The credit utilization ratio (CUR) is arguably the most sensitive factor to changes when you close a credit card. It's calculated by dividing the total balance you owe across all your credit cards by the total credit limit you have available across all those cards. A high CUR suggests you are relying heavily on credit, which is seen as a riskier behavior by lenders.

How Closing a Card Increases Your CUR

When you close a credit card, its credit limit is removed from your total available credit. If you carry balances on your other credit cards, this reduction in your total credit limit will automatically increase your CUR, even if your balances remain the same. For example:

Scenario 1: Before Closing a Card

Card A: Balance $1,000, Limit $5,000

Card B: Balance $2,000, Limit $10,000

Total Balance: $3,000

Total Credit Limit: $15,000

Credit Utilization Ratio: ($3,000 / $15,000) * 100 = 20%

Scenario 2: After Closing Card A (with $0 balance)

Card B: Balance $2,000, Limit $10,000

Total Balance: $2,000

Total Credit Limit: $10,000

Credit Utilization Ratio: ($2,000 / $10,000) * 100 = 20%

Wait, the ratio didn't change? Let's consider a more common scenario where the closed card had a balance or other cards have balances.

Scenario 3: After Closing Card A (with $0 balance) and Card B has $2,000 balance

Card B: Balance $2,000, Limit $10,000

Total Balance: $2,000

Total Credit Limit: $10,000

Credit Utilization Ratio: ($2,000 / $10,000) * 100 = 20%

This example still shows no change. The key is when the closed card *contributes* to the total available credit. Let's re-evaluate the impact of removing a limit.

Scenario 4: Before Closing Card A (Balance $1,000, Limit $5,000) and Card B (Balance $2,000, Limit $10,000)

Total Balance: $3,000

Total Credit Limit: $15,000

Credit Utilization Ratio: ($3,000 / $15,000) * 100 = 20%

Scenario 5: After Closing Card A (which is now removed from the calculation)

Card B: Balance $2,000, Limit $10,000

Total Balance: $2,000

Total Credit Limit: $10,000

Credit Utilization Ratio: ($2,000 / $10,000) * 100 = 20%

The previous example was flawed. The key is that the *limit* is removed. Let's try again, focusing on the limit reduction.

Scenario 6: Before Closing Card A (Balance $1,000, Limit $5,000) and Card B (Balance $2,000, Limit $10,000)

Total Balance: $3,000

Total Credit Limit: $15,000

Credit Utilization Ratio: ($3,000 / $15,000) * 100 = 20%

Scenario 7: After Closing Card A (Balance $0, Limit $5,000)

Card B: Balance $2,000, Limit $10,000

Total Balance: $2,000

Total Credit Limit: $10,000

Credit Utilization Ratio: ($2,000 / $10,000) * 100 = 20%

This is still not illustrating the point. The core issue is that the *limit* is removed. Let's use a different example where the balance is significant.

Scenario 8: Before Closing Card A (Balance $3,000, Limit $5,000) and Card B (Balance $2,000, Limit $10,000)

Total Balance: $5,000

Total Credit Limit: $15,000

Credit Utilization Ratio: ($5,000 / $15,000) * 100 = 33.3%

Scenario 9: After Closing Card A (Balance $0, Limit $5,000)

Card B: Balance $2,000, Limit $10,000

Total Balance: $2,000

Total Credit Limit: $10,000

Credit Utilization Ratio: ($2,000 / $10,000) * 100 = 20%

This shows a *decrease* in CUR, which is good. The impact is when closing a card *reduces* the available credit and *increases* the utilization of remaining credit.

Scenario 10: Before Closing Card A (Balance $0, Limit $5,000) and Card B (Balance $10,000, Limit $10,000)

Total Balance: $10,000

Total Credit Limit: $15,000

Credit Utilization Ratio: ($10,000 / $15,000) * 100 = 66.7%

Scenario 11: After Closing Card A (Balance $0, Limit $5,000)

Card B: Balance $10,000, Limit $10,000

Total Balance: $10,000

Total Credit Limit: $10,000

Credit Utilization Ratio: ($10,000 / $10,000) * 100 = 100%

This is the critical scenario. Closing a card with a significant limit, especially if your other cards are maxed out or have high balances, will dramatically increase your CUR.

Ideal Credit Utilization Ratio

Generally, keeping your credit utilization ratio below 30% is recommended. However, experts suggest that aiming for below 10% can provide the most significant boost to your credit score. A sudden increase in your CUR due to closing a card can push you into riskier territory, potentially lowering your score by 20-50 points or more, depending on your starting score and the magnitude of the change.

The Effect on Revolving Credit

Credit cards represent revolving credit. A healthy mix of revolving credit and installment loans can be beneficial. Closing a credit card reduces your overall revolving credit limit, which can negatively affect the credit mix factor and, more importantly, your credit utilization.

Length of Credit History: The Longevity Factor

The age of your credit accounts is a significant contributor to your credit score. Lenders want to see that you have a history of managing credit responsibly over an extended period. Closing an older credit card can have a detrimental effect on this aspect of your credit profile.

Average Age of Accounts

When you close a credit card, especially an older one, it is typically removed from your credit report after a period (usually 7-10 years, depending on the reporting agency and the account's status). However, its closure also removes its entire history from the calculation of your average age of accounts. If this was your oldest or one of your oldest accounts, its removal can significantly decrease the average age, signaling less experience managing credit.

Impact of Closing Your Oldest Account

Closing your oldest credit card account is generally the most damaging to your credit history length. This account often represents your longest track record of responsible credit use. Its removal can make your credit profile appear younger and less established, which can lead to a lower credit score.

Example of Average Age Calculation

Let's say you have three credit cards:

• Card A: Opened 10 years ago
• Card B: Opened 5 years ago
• Card C: Opened 2 years ago

Average Age = (10 + 5 + 2) / 3 = 17 / 3 = 5.67 years

If you close Card A (your oldest), your remaining accounts are Card B and Card C:

Average Age = (5 + 2) / 2 = 7 / 2 = 3.5 years

This drop from 5.67 years to 3.5 years can negatively impact your score, especially if the length of credit history is a significant factor for you.

Types of Credit Accounts and Their Influence

The composition of your credit accounts, known as your credit mix, also plays a role in your credit score. While not as impactful as payment history or utilization, a diverse credit mix can be beneficial. Closing a credit card can alter this mix.

Revolving vs. Installment Credit

Credit cards are a form of revolving credit, meaning you can borrow, repay, and borrow again up to a certain limit. Installment loans, such as mortgages, auto loans, and personal loans, involve borrowing a fixed amount that you repay over a set period with regular payments. Lenders like to see that you can manage both types of credit responsibly.

Impact on Credit Mix

If you have a limited credit mix and closing a credit card leaves you with only installment loans or no credit cards at all, it could negatively affect this factor. For instance, if you only have one credit card and close it, you'll no longer have any revolving credit, which might be viewed less favorably by some scoring models.

Store Cards and Their Specific Impact

Store credit cards often have lower credit limits. While closing them might not drastically impact your overall credit utilization if you have other cards with high limits, they can still affect the length of your credit history if they are older accounts. Additionally, some store cards are considered "lesser" forms of credit, and their closure might have a less significant impact than closing a major bank card.

When Closing a Card Might Be Okay (or Even Beneficial)

While closing a credit card often carries risks, there are specific situations where it might be a reasonable or even advantageous decision. These scenarios typically involve mitigating ongoing costs, avoiding temptation, or simplifying financial management.

Avoiding Annual Fees

If a credit card comes with a substantial annual fee that you no longer find justifiable based on the rewards or benefits it offers, closing it can save you money. This is especially true if the card offers no other compelling reason to keep it open.

Preventing Overspending

For individuals who struggle with impulse spending or have difficulty managing credit card debt, closing a card can be a proactive step towards financial discipline. Removing the temptation of a readily available credit line can help prevent the accumulation of more debt.

Consolidating and Simplifying Finances

Managing too many credit cards can become overwhelming. If you have multiple cards with small balances or are not actively using them, closing some can simplify your financial life, making it easier to track payments and manage your overall credit exposure.

Cards with High Interest Rates and No Benefits

If a card has a very high Annual Percentage Rate (APR) and doesn't offer any significant rewards, perks, or benefits that outweigh the cost of carrying it, closing it might be a wise decision, especially if you tend to carry a balance. However, it's crucial to pay off any outstanding balance before closing.

Cards with Poor Customer Service or Limited Utility

Sometimes, a card issuer's customer service is consistently poor, or the card's acceptance is limited. If these issues significantly detract from your user experience, closing the card might be a consideration, provided the impact on your credit score is manageable.

Strategies to Mitigate Negative Impact Before Closing

If you've decided that closing a credit card is the right move for you, there are several proactive steps you can take to minimize any potential negative consequences on your credit score. These strategies focus on preserving your credit utilization and credit history as much as possible.

1. Pay Down Balances Strategically

Before closing a card, especially one with a balance, ensure you pay it off in full. Carrying a balance on a card you intend to close can lead to interest charges and might complicate the closure process. If you're closing a card to reduce overall debt, make sure the balances are zeroed out.

2. Understand the Card's Impact on Your Credit Profile

Before taking action, review your credit report. Identify which cards are oldest, which have the highest credit limits, and what your current credit utilization is across all your cards. This information will help you assess which card's closure will have the most significant impact.

3. Consider Downgrading Instead of Closing

If the card has an annual fee you wish to avoid, inquire with the issuer about downgrading to a no-annual-fee card. This allows you to keep the account open, preserving its history and credit limit, without incurring the fee. This is often the best way to keep older accounts active.

4. Use the Card for Small, Recurring Purchases

If you are closing a card primarily due to its age and want to keep it open, consider using it for a small, recurring purchase (like a streaming service subscription) and setting up automatic payments to pay it off in full each month. This keeps the account active and demonstrates continued responsible use.

5. Transfer Balances (with Caution)

If you have a balance on the card you intend to close and want to avoid paying it off immediately, you could consider transferring the balance to another credit card with a 0% introductory APR offer. However, be mindful of balance transfer fees and the APR after the introductory period ends. This doesn't close the account but moves the debt.

6. Maintain a Low Credit Utilization Ratio on Remaining Cards

If closing a card will reduce your overall available credit, proactively lower the balances on your other credit cards. Paying down balances on your remaining cards before closing the one in question can help offset the increase in your credit utilization ratio.

7. Check for Automatic Payments Linked to the Card

Before closing, ensure no automatic payments (like utility bills, subscriptions, or loan payments) are linked to the card. Missing these payments after closure can lead to late fees and negatively impact your credit score. Update your payment information with the new card or payment method.

8. Understand the Reporting Timeline

Once you request to close a card, it may take some time for the issuer to report the closure to the credit bureaus. The account will typically remain on your credit report for several years even after closure, but its credit limit will be removed from your total available credit calculation sooner.

Alternatives to Closing a Credit Card

Closing a credit card is not the only solution for managing your credit. In many cases, there are alternatives that can achieve your financial goals without negatively impacting your credit score. Exploring these options can often be more beneficial in the long run.

1. Product Change/Downgrade

As mentioned, if your primary concern is an annual fee, ask the issuer to "product change" or "downgrade" your card to a no-annual-fee version. This keeps the account open, preserving its age and credit limit, while eliminating the fee. This is a highly recommended strategy for older, established accounts.

2. Negotiate a Lower Annual Fee

Sometimes, you can call the credit card issuer and negotiate a lower annual fee, especially if you are a long-time customer with a good payment history. They may offer a reduced fee or waive it entirely to retain your business.

3. Use the Card Strategically for Rewards

If a card offers valuable rewards or benefits that you are not fully utilizing, make an effort to use it for purchases that align with its bonus categories or benefits. This can make the annual fee worthwhile and ensure you're getting value from the card.

4. Ignore the Card (if no annual fee)

If the card has no annual fee and you don't use it, you can simply let it sit dormant. It will continue to age and contribute positively to your credit history length and available credit. However, be aware that some issuers may close dormant accounts after a prolonged period of inactivity.

5. Increase Credit Limits on Other Cards

If your concern is credit utilization, instead of closing a card (which reduces your total available credit), consider requesting a credit limit increase on your other, actively used credit cards. This can lower your overall credit utilization ratio without sacrificing an existing account's history.

6. Focus on Paying Down Balances

The most effective way to improve your credit score is to pay down your existing balances. If you're struggling with debt, focus your efforts on reducing balances on your highest-interest cards first. This improves your utilization and saves you money on interest.

7. Balance Transfer to a 0% APR Card

If you have a balance on a card with a high APR that you want to close, consider transferring it to a new card with a 0% introductory APR. This allows you to pay down the debt interest-free for a period, but be mindful of transfer fees and the APR after the promotional period. This does not close the account you are transferring from, but it is a strategy to manage debt on a card you might otherwise want to close.

Making the Final Decision: A Step-by-Step Approach

Deciding whether to close a credit card requires careful consideration of your personal financial situation and credit goals. Follow these steps to make an informed decision that aligns with your objectives.

Step 1: Assess Your Credit Score and Goals

Before doing anything, check your current credit score. Are you aiming to improve it, maintain it, or are you less concerned about minor fluctuations? Understanding your starting point and your desired outcome is crucial.

Step 2: Review Your Credit Report

Obtain a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com. Identify:

• The age of each of your credit accounts.
• The credit limit of each account.
• Your current balances on each account.
• Any fees associated with the card (annual fees, etc.).
• The type of credit (revolving, installment).

Step 3: Calculate Your Current Credit Utilization Ratio (CUR)

Sum up all your credit card balances and divide by the sum of all your credit card limits. Calculate this for all your credit cards combined. Then, calculate the CUR for each individual card.

Step 4: Identify the Card You're Considering Closing

Determine which card you are thinking of closing and why. Is it the oldest, has the highest limit, has an annual fee, or is it unused?

Step 5: Simulate the Impact of Closing the Card

Mentally (or on paper) remove the credit limit of the card you intend to close from your total available credit. Recalculate your overall CUR. Also, consider how closing this card would affect the average age of your accounts.

Example Simulation:

You have Card A (Limit $5,000, Balance $1,000) and Card B (Limit $10,000, Balance $2,000). Total Limit: $15,000. Total Balance: $3,000. CUR: 20%.

If you close Card A:

Remaining Card B (Limit $10,000, Balance $2,000). New Total Limit: $10,000. New Total Balance: $2,000. New CUR: 20%. (In this specific case, no change in CUR, but the *available credit* has decreased).

If Card A had a $4,000 balance, and you close it:

Before: Total Balance $6,000 (Card A $4,000, Card B $2,000), Total Limit $15,000. CUR: 40%.

After closing Card A (assuming balance is paid off): Remaining Card B (Limit $10,000, Balance $2,000). New Total Limit: $10,000. New Total Balance: $2,000. New CUR: 20%.

This illustrates how closing a card *can* improve CUR if it had a high balance and a significant limit, but it also reduces your total available credit, which is generally not ideal.

Step 6: Evaluate Alternatives

Consider the alternatives discussed earlier: downgrading, negotiating fees, using the card for small purchases, or requesting credit limit increases on other cards. Would any of these achieve your goals without the negative impact of closure?

Step 7: Weigh the Pros and Cons

List the advantages and disadvantages of closing the specific card. For example, pros might be saving on an annual fee or reducing temptation. Cons might be a higher CUR or a shorter credit history length.

Step 8: Make Your Decision

Based on your assessment, decide whether to close the card, keep it open, or pursue an alternative. If you decide to close it, ensure you follow the recommended steps to mitigate negative impacts.

Conclusion: Navigating Credit Card Closures Wisely

Will closing credit cards affect your credit score? The answer is unequivocally yes, though the degree of impact varies significantly. Closing a credit card can lower your credit utilization ratio by reducing your total available credit, and it can shorten the average age of your credit accounts, particularly if it's an older card. These changes can lead to a noticeable drop in your credit score, especially if your credit profile is otherwise thin or heavily reliant on that particular account. However, there are situations where closing a card, such as one with a high annual fee or one that tempts you to overspend, might be a necessary step for financial management. The key lies in understanding these potential impacts and taking proactive steps to mitigate them. Always prioritize paying off balances, consider downgrading instead of closing, and strategically manage your remaining credit lines to maintain a healthy credit utilization ratio. By approaching credit card closures with a well-informed strategy, you can protect your creditworthiness and make decisions that serve your long-term financial well-being.