How Closing a Credit Card Can Affect Your Credit Score

It’s probably happened to you at some point. You rummaged through your wallet and found a credit card you haven’t used in months, if not years. Or maybe just reviewed your credit report and saw an account you opened years ago to get a discount on a pair of jeans. 

If you have a credit card you barely use, your first instinct might be to cut it up and close the account. Sometimes that may be the right move, but sometimes it isn’t. Here we’ll go over how closing a credit card can impact your credit score and how to know when closing it is the right option.

What happens when you close a credit card?

When you close a credit card, you lose access to the account and can no longer make purchases using the card. This also means you lose access to the credit limit that card provided, which, as we’ll explore, matters more than most people realize.

What surprises many is that closing a credit card doesn’t automatically remove it from your credit report. In fact, credit card accounts can actually stay on your credit history for up to ten years, meaning the history (both good and bad) sticks with you even long after you cancel your card.

Analicia Booth, a Community Banker at Amplify, points out, “A lot of people think closing an account automatically wipes out the credit history that comes with it. It’s a common misconception, but the history actually stays on your credit report, which is good news for your credit age.”

So, how does closing a credit card impact your overall financial picture? The impact boils down to two main factors: your credit utilization ratio and the average age of your credit accounts. Depending on your situation, closing a card might have little to no effect, or it could result in a multiple-point difference on your credit score. Context is important.

How does closing a credit card affect your credit score?

Your credit score is calculated based on several factors, but if you’re considering closing a credit card account, the two main scoring factors to consider are your credit utilization ratio and the average age of your accounts. 

Credit Utilization Ratio

Credit utilization ratio is how much of the credit available to you that you’re currently using. For instance, if you have a $10,000 credit limit across two credit card accounts and have a $3,000 credit card balance, your credit utilization ratio is 30%. 

To achieve a higher credit score, it’s usually best to keep your credit utilization ratio below 30%. This is where closing a credit card can have a negative impact. If you close a credit card that had a $5,000 credit limit, even if you never used it, but still have a $3,000 balance on the other card, your credit utilization suddenly jumps to 60%. 

Average Age of Accounts

Another major factor in determining your credit score is how long each of your credit accounts has been open, and longer usually means better. 

If the card you’re thinking of closing is relatively new, it may have minimal impact on your overall credit score. However, if it’s an account you opened as a teenager over 20 years ago, closing it can drastically impact the average age of your remaining accounts, resulting in a lower credit score. 

When does closing a credit card make sense?

While closing a credit card can have an effect on your credit score, it isn’t inherently bad. In fact, sometimes it can be the most prudent financial decision you can make.

There are several reasons that could make closing the account the smarter option:

• High annual fees: Many credit cards charge an annual fee in order to access the benefits they provide. However, if you have a card with an annual fee of $95 that accrues points for travel — but you no longer travel — are you really getting value from that card?
• Simplification: You might be in a phase of your life where you’re trying to simplify your finances or reduce the temptation to spend. These are also legitimate reasons to close an account.
• Divorce: Closing an account that you shared with your spouse might be necessary when disentangling finances after a separation.
• Fraud: Identity theft is a growing threat, with 1.3 million people in the U.S. reporting identity theft and an additional 3 million cases of related fraud. If one of your credit cards has been affected, closing it (or at least placing a lock on it) is one way to protect yourself from fraud.
• Interest rates: The average credit card interest rate is significantly higher than other types of credit, but some cards have rates that might be unreasonably high compared to alternatives. If you do close an account due to the interest rate, be sure to pay off your balance first. Closing the account will not eliminate the debt or stop interest from accruing.

Ultimately, the decision to close a credit card should come down to whether keeping the account serves you. A potential change to your credit score is worth considering, but it’s only one part of the picture. If a card is costing you money, creating complexity, or no longer fits your needs, closing it may still be the right move.

What happens if you don’t use your credit card?

Sometimes, keeping a credit card open that you don’t use will have zero impact on your financial life. It may just help increase your total available credit and lower your credit utilization ratio. 

However, some issuers may automatically close a card after 12 to 24 months of inactivity. In that case, you lose control over the timing of the account closing and your credit score may be unexpectedly impacted at an inopportune time.

The good news: there’s an easy workaround. You can use the card to pay one specific bill each month (say, a streaming subscription) and set up automatic payments to pay it off. You keep the card open while zeroing out the balance each month, and your credit utilization stays low. Sometimes, the best thing a credit card can do for you is to simply stay open.

How To Close a Credit Card (If You Decide To)

If, after considering your options, you decide that closing your credit card is the way to go, the process is straightforward. Just make sure the timing works in your favor. For instance, avoid closing a card right before a major loan application, like a mortgage or auto loan.

When you’re ready, here’s how to cancel your card cleanly:

1. Pay off the balance or transfer it to another account.
2. Redeem any remaining rewards.
3. Call the issuer to close the card and get a confirmation number.
4. Follow up in writing. Send an email or letter to confirm the closure request for your records.
5. Check your credit report after 30-60 days to ensure the closure has been reported correctly. You can check your credit report for free at AnnualCreditReport.com. 

Alternatives to Closing a Credit Card

If you’re still not sure you want to cancel your card, there are other options. Here are a few alternatives you might explore first:

• Downgrade the card. If you ask, the card issuer will often allow you to switch to a no-fee version of the same card. The benefits might change when you drop the annual fee, but your account history and credit limit remain the same.
• Negotiate the fee. Many credit card issuers will waive or reduce the annual fee for a loyal customer if you call and ask directly. It’s not guaranteed, but it never hurts to try.
• Hide the card. Store the card somewhere inconvenient so you won’t have the temptation to swipe. The account stays open and working for your credit, but you keep the balance at zero.

Make an Informed Decision

Closing a credit card can affect your credit score, but the magnitude will depend on your overall credit profile. If you have a low credit utilization ratio and several long-standing accounts, canceling the card may have little to no impact. On the other hand, if you have limited credit or the card in question is your oldest account, you might think twice.

Ultimately, there’s no simple right or wrong answer. Whether you decide to cancel your credit card or not will depend on your situation. The most important thing is to ensure you make an informed choice, not an impulsive one. If you’re not sure, a community banker or financial advisor can help you decide.