If you’ve ever wondered whether closing a credit card will hurt your credit score, you’re not alone. Many people face this dilemma—should they keep an old credit card open for the sake of their credit, or close it to cut back on unnecessary expenses or avoid temptation? The impact of closing a credit card on your score isn’t always straightforward. It depends on several factors related to how credit scores are calculated and your personal credit profile. In this article, we’ll explore the ins and outs of what happens when you close a credit card, why your credit score might change, and what steps you can take to protect your credit health in the process.

Understanding Credit Scores and How They’re Calculated

Before diving into the specifics of how closing a credit card affects your score, it’s important to understand how credit scores are built. Your credit score is a three-digit number calculated based on data in your credit report, primarily using information from the FICO scoring model or VantageScore. These scores help lenders decide how creditworthy you are—essentially, whether you’re a low-risk or high-risk borrower.

There are five key factors that influence your credit score:

• Payment History (35%): Have you paid your bills on time?
• Credit Utilization (30%): How much of your available credit are you using?
• Length of Credit History (15%): How long have your accounts been open?
• New Credit (10%): How many new accounts or credit inquiries have you had recently?
• Credit Mix (10%): Do you have a mix of different types of credit accounts?

All these factors work together to create a credit score, typically ranging from 300 to 850. A higher score means better creditworthiness, which leads to more favorable loan terms, credit card approvals, and even impacts your insurance rates or rental applications.

Why People Close Credit Cards

People choose to close credit cards for various reasons. Sometimes it’s to avoid an annual fee, reduce temptation to overspend, improve budgeting, or simply to declutter their financial lives. However, closing a card might seem like a simple way to clean up finances, but it carries potential risks when it comes to your credit score.

How Closing a Credit Card Can Affect Your Credit Utilization Ratio

One of the most significant impacts of closing a credit card is its effect on your credit utilization ratio. This ratio is the amount of credit you’ve used relative to your total available credit limits. For example, if you have two credit cards with limits of $5,000 each, your total available credit is $10,000. If you owe $2,000 on one card and $1,000 on another, your overall utilization is 30% ($3,000/$10,000).

Why Utilization Matters

Credit scoring models view credit utilization as a strong indicator of credit risk. A lower utilization ratio typically signals responsible credit management. Experts recommend keeping your utilization below 30%, and ideally closer to 10%, to maintain or improve your score.

The Impact of Closing a Card on Utilization

When you close a credit card, especially one with a high credit limit and low or zero balance, your total available credit decreases. If your balances remain the same, this reduces your credit limit denominator, thereby increasing your credit utilization percentage. An increased utilization can lead to a drop in your credit score.

Example Scenario

As shown in the table, by closing a credit card that halves your credit limit, the credit utilization ratio doubles, which can significantly impact your credit score.

How Closing a Credit Card Affects Your Credit History Length

Another key factor in credit scoring is the length of your credit history, which looks at both the age of your oldest account and the average age of all your accounts. A longer credit history usually contributes positively to your score because it gives lenders a better sense of your financial behavior over time.

Will Closing a Card Shorten Your Credit History?

Interestingly, closing a credit card doesn’t instantly erase its history. The account typically remains on your credit report for up to 10 years if it was in good standing before closure. That means the contribution toward your credit history length may remain intact for a while after closing the card.

What Happens When the Account Eventually Drops Off?

Once the account falls off your credit report (often after about 10 years), your average credit history length may decrease if that closed account was one of your oldest cards. This could potentially lower your credit score.

The Effect on Your Credit Mix and New Credit Factors

Credit scoring models like to see a healthy mix of different types of credit—such as credit cards, installment loans, mortgages, and retail accounts. Closing a credit card may slightly reduce your credit mix, but this factor only makes up about 10% of your score. The impact of closing one card is usually minimal unless it’s your last revolving credit account.

Additionally, closing a card does not impact your “new credit” factor immediately because those rely on recent inquiries or recently opened accounts. So, in the short term, you may not see changes related to this.

When Closing a Credit Card Can Actually Help Your Credit Score

Many articles focus on the negative impact of closing credit cards, but there are situations where closing a card can lead to a better credit standing or overall financial health.

• Reducing Annual Fees: If a card has a high annual fee and you’re not using it, closing it can save money without much impact on your credit score if managed well.
• Avoiding Overspending: For people who struggle with overspending, closing a card can help limit temptation, leading to better financial habits and ultimately healthier credit.
• Managing High Balances: Closing a card with a balance is not advisable, but closing zero balance cards while paying down utilization on other cards might make sense for some.

Moreover, if you’re closing a recent card that you opened just to get a bonus but don’t want to keep long term, sometimes that can improve your score by reducing new credit inquiries.

Tips to Minimize the Negative Impact When Closing a Credit Card

If you decide that closing a credit card is right for you, here are some smart ways to minimize damage to your credit score:

1. Pay Down Balances First

Before closing a card, try to pay down your total balances on other cards to maintain a healthy credit utilization ratio. Reducing your debt balances reduces utilization, even if your credit limit decreases.

2. Keep the Oldest Accounts Open

Try not to close your oldest credit card, as this will keep your credit history length long.

3. Avoid Closing Several Cards at Once

Closing multiple cards simultaneously can severely reduce your available credit and shorten credit history, leading to a bigger hit on your credit score.

4. Transfer Balances to Other Cards

If you’re closing a card that has a balance, first try to transfer the balance to another card with a lower interest rate to avoid interest piling up.

5. Monitor Your Credit

After closing a card, keep an eye on your credit report and score to understand any changes and address issues quickly if necessary.

Frequently Asked Questions About Closing Credit Cards and Credit Scores

Alternative Strategies Instead of Closing a Credit Card

If you’re hesitant about closing a credit card but want to address the reasons behind considering it, here are some other strategies:

• Downgrade the Card: Some credit card issuers allow you to switch to a no-fee version of the card, which helps you keep the credit line open without paying an annual fee.
• Use the Card Occasionally: Charge small purchases every few months and pay them off immediately to keep the card active.
• Set Up Automatic Payments: This minimizes the risk of missed payments and helps maintain a positive payment history.
• Freeze the Card: Temporarily freeze your card if you’re worried about overspending rather than closing it outright.

Taking these steps can preserve your credit while addressing your financial management concerns.

Conclusion

Closing a credit card can have a noticeable impact on your credit score, especially by increasing your credit utilization ratio and potentially shortening your credit history once the card drops off your report. However, the actual effect varies depending on your overall credit profile, the age of the account, and how you manage other credit accounts. While closing a card can save money on fees and reduce the risk of overspending, it’s essential to weigh these benefits against the potential negative consequences on your credit health. By paying down balances, keeping older cards open, and monitoring your credit regularly, you can minimize any adverse effects. Ultimately, the key is to make informed decisions based on your financial goals and credit circumstances. Closed cards don’t have to spell doom for your score if you approach the process thoughtfully and strategically.