Is it bad to cancel a credit card? It depends on your financial situation. It might feel like cutting ties with an old friend, but before you make the call, it’s important to understand – does closing a credit card hurt your credit?
Spoiler: it can. But it doesn’t have to. Here’s the ins and outs of credit card cancellation so you can make a smart decision for your finances.
How does closing a credit card hurt your credit?
Closing a credit card can impact your credit score in several ways. Here’s what you need to know about the key factors:
Increases your credit utilization ratio
When you close a credit card, your overall available credit decreases, which can raise your credit utilization ratio. This ratio measures how much credit you’re using compared to how much is available. A higher ratio can hurt your credit score.
Example: If you have a total credit limit of $10,000 and you’ve used $3,000, your utilization is 30%. If you close a card with a $5,000 limit, your total available credit drops to $5,000. Now, your utilization jumps to 60%, even though your spending hasn’t changed.
Shortens your credit history length
The length of your credit history is another factor in your credit score. When you close a card, it’s no longer contributing to your credit history’s average age.
Example: If you have three credit cards, one you’ve had for 10 years, another for 5 years, and one for 1 year, closing the 10-year-old account will significantly lower the average age of your accounts, which can hurt your score.
Can negatively impact your credit mix
Lenders like to see a variety of credit types on your report. If you close a credit card, you might lose that diversity, especially if it’s your only revolving credit account.
Example: If you have an auto loan, a mortgage, and one credit card, closing the card could mean your credit report only shows installment loans, which can make your profile less appealing to lenders.
Recommended: Does Closing Your Bank Account Affect Your Credit?
Other potential consequences of closing a credit card
Ever wondered what happens when you close a credit card? Beyond its impact on your credit score, closing a card can have other effects on your overall financial situation.
- Reduces your overall credit limit: This can affect your ability to handle large expenses in the future.
- Can create a perception of risk for lenders: Lenders might see fewer accounts as a sign of instability.
- Might increase the impact of existing hard inquiries: If you’ve recently applied for credit, closing an account might amplify the negative effects.
- Can affect your payment history if not managed properly: Missing a final payment or neglecting to check your balance could harm your credit score.
When should you keep or close a credit card?
Deciding whether canceling a credit card is the right choice depends on your personal financial goals and circumstances. While keeping a card open can help build credit history and maintain a low utilization ratio, canceling a credit card might make sense if the card comes with high fees or tempts you to overspend. The key is to weigh the benefits of keeping the card against the potential downsides.
When to maintain a credit card | When to close a credit card |
Building credit history: If it’s one of your oldest accounts, keeping it open helps maintain your credit history length. | High fees or interest rates: If the card costs more than it’s worth, closing might be the right choice. |
Maintaining a low credit utilization ratio: More available credit helps keep your utilization ratio low. | Consistent temptation to overspend: If the card leads to poor financial habits, it could be better to cancel. |
Retaining benefits and rewards: If the card offers valuable perks, keeping it might make sense. | Account mismanagement: If it’s hard to keep track of multiple cards, simplifying your finances could help. |
Emergency backup: Having an additional card can be helpful in unexpected situations. | Change in financial circumstances: If you’re downsizing your financial commitments, closing a card might fit your plan. |
How to close a credit card safely
Knowing how to close a credit card properly is essential to avoid unnecessary credit impacts or financial complications. Whether you’re dealing with a card you no longer use or one with high fees, following these steps is the best way to cancel a credit card.
- Pay off the balance: Always pay off your card in full. If you’re closing a credit card with a balance, interest will continue to accrue until it’s paid.
- Redeem any rewards: Use up any points or cashback you’ve accumulated before canceling.
- Notify the issuer: Call your credit card company to request closure formally. Confirm there’s no remaining balance or fees.
- Monitor your credit report: After closure, check your credit report to ensure the account is marked as “closed by customer.”
- Shred the card: Destroy the card to prevent unauthorized use.
Learn More: How to Close a Credit Card
Alternatives to closing a credit card
If closing a card feels too drastic, here are some alternatives.
- Negotiate to waive fees or adjust terms: Contact your issuer to ask for a reduced annual fee or lower APR.
- Consider downgrading to a basic version: Some issuers offer no-fee versions of premium cards.
- Transfer the balance to another card with better terms: Look for a balance transfer card with a lower interest rate or no transfer fees.
Recommended: How To Pay a Closed Credit Card Account
Weigh the pros and cons of closing a credit card
When deciding about closing a credit card, it’s crucial to understand how it impacts your credit score. Consider the pros and cons of closing a credit card, and only proceed if it aligns with your financial goals. Whether you’re wondering when to close a credit card or how to minimize its effects, taking thoughtful steps can make all the difference. Need help finding a card that fits your needs?
Explore your credit card options with MoneyLion!
FAQ
How does closing a credit card affect my credit score?
Closing a card can increase your credit utilization ratio, shorten your credit history, and reduce your credit mix.
Can closing a credit card improve my credit score?
It’s unlikely. Closing a card often reduces your credit score in the short term.
How long does a closed credit card stay on your credit report?
Closed accounts typically remain on your credit report for 7 to 10 years.