How Closing a Credit Card Affects Your Credit Score

Each of us probably has a credit card in the back corner of your wallet that you haven’t used for a long time. And more than once you may have thought about whether you should cancel that card. But closing a card might not be the smartest thing to do, as this move could certainly hurt your score.

To begin with, your credit score is determined by several factors, which are weighted differently:

• Payment history – 35% of your credit score
• Level of debt (amount owed) – 30% of your credit score
• Length of credit history – 15% of your credit score
• New credit – 10% of your credit score
• Types of credit used (credit mix) – 10% of your credit score.

Two of those factors namely the length of your credit history and the level of debt (credit utilization ratio) can be directly affected by cancelling a credit card. Let’s see how closing an old credit card can affect your credit and what options exist if you choose to keep that piece of plastic.

Length of credit history is basically how long you’ve been using credit cards and considers the age of your oldest account, the age of your newest account and the average age of all your accounts, the longer you’ve been using credit accounts, the better it is for your credit score.

Closing your oldest card will accordingly change the date against which the length of credit history is calculated to your next oldest form of credit, and so might shorten the overall length of your credit history.

The amount of credit limit you use, expressed as a percentage, is called credit utilization and is the second most important factor.

Your utilization rate takes into account your debt-to-credit ratio (the amount of debt you currently have versus the amount of credit you have available) across all accounts and your individual credit card balances as compared to their limits. Most experts typically recommend keeping these ratios below 30%, but in general, the lower the rate, the better. Most people with excellent credit have a median credit utilization rate at 10% or below.

Canceling a credit card has the potential to reduce your score. Therefore, if you don’t want to hold on to a credit card for whatever reason, there are some other options worth considering.

Some consumers decide to close accounts they aren’t using to avoid an annual fee, but you might try to do otherwise. Depending on your card issuer and a card type, you may be able to downgrade the credit card you have to a different card product that doesn’t charge an annual fee. To downgrade your credit card to a no-fee option, contact your card issuer using the number on the back of your credit card to make a request.

If you aren’t interested in upgrading or downgrading your card, consider keeping the account open by using the card occasionally. You could simply put one small charge on it every month to keep the account active. You could also use it for any recurring payments, such as a streaming service or any subscription, and set up automatic payments, so your balance gets paid on time every month.

When closing a credit card is worth it

Closing a credit card account is sometimes necessary, despite recommendations not to do so.

A temporary drop by a few points shouldn’t hold you back from closing a credit account when you are paying an annual fee that’s no longer worthwhile, or your card has high interest rates.

It’s also best to close joint credit card accounts during a separation or divorce. As a joint cardholder, you are responsible for any past or future charges made on the account.

Before you close a credit card, make sure you pay off any balances (not just the one you’re canceling) first or transfer debt to a balance transfer card to benefit from an introductory interest-free period.

Bottom line

To sum up, keeping your accounts active even with a zero balance can help you maintain and improve your credit score.

The hit your credit score will undergo from closing a card will only be temporary if you have other active card accounts open and handle them responsibly. In any case, you need to continue to pay your bills on time and in full, as your payment history determines 35% of your credit score. In fact, how timely you pay your bills affects your credit score more than any other factor.

If you don’t have any other cards in your wallet, you may want to apply for a new one before you close the old card, as not having any card or loan payment activity on your credit reports can result in eventually having no credit score at all.