Does Closing a Credit Card Hurt Your Credit Score?
When starting your credit repair journey you may be tempted to close credit card accounts, especially if the credit card has negative entries on it, such as a late payment.
Cancelling a credit card if you rarely use it or have paid off the balance can feel good. It can give you a sense of accomplishment while lightening your wallet and giving you one less way to spend.
Should I Cancel My Credit Cards?
Generally, cancelling your credit cards is a bad idea. It’s actually better for your credit score, in most cases, if you keep the account open because a big part of your credit score depends on how much credit history you have. If you want to keep your credit score where it is or improve it, then holding on to a credit card is a good option.
After all, cancelling a credit card doesn’t remove the account from your credit report. Your payment history and credit history length will stay on your credit report for 10 years. That can be a good thing — it shows your credit history length, which accounts for 15 percent of a credit score.
Closing Credit Cards Can Hurt Your Credit Score
By keeping your credit cards open, you’re adding credit history to your credit profile, even if it has negative marks. It’s much better to try and remove late payments from your credit cards than to close them.
I made this mistake when I started my own credit repair journey, actually.
Closing credit card accounts seemed logical to me at the time. I thought, “Ok, I have a bunch of credit cards, I have paid them off, and I don’t want to be tempted to use them again so I better close these accounts.”
I also said to myself, “Hey, this will improve my credit score too! The magic FICO credit score generator will see that I am acting responsibly by closing credit card accounts after I paid them off!”
This couldn’t have been farther from the truth.
Why Does Cancelling a Credit Card Affect Your Credit Score?
Your credit score is largely based on how well you manage open credit accounts.
If the account is closed, there is nothing to go off of except the account history before you closed the account (which is probably bad if you closed the account).
An excellent credit score reflects that the individual has had long term, well-managed credit accounts.
Also, while it is true that too many open credit card (revolving) accounts can hurt your credit score, the key is to shy away from opening too many accounts, not closing the accounts.
Bottom Line: Never close an open credit card account –it can hurt your credit score.
Credit Utilization Falls if You Cancel
Closing credit cards will hurt your credit utilization, which is the percentage of your available credit used. The lower your credit utilization, the more it will increase your credit score. About 30 percent of a credit score comes from credit utilization.
By cancelling a card, you’ll have less available credit to spend. If you spend the same amount on your credit cards, your credit utilization ratio will rise because you have less available credit.
Credit Utilization Ratio Explained
Here’s an example: Suppose you have three credit cards with $10,000 each in available credit, for a total of $30,000. You use about $10,000 of that credit each month, charging about $3,333 per card. That gives you a 30 percent credit utilization ratio, which is about as high as you want it to go for credit scoring purposes.
Drop one of those cards and you now have $20,000 in available credit, but are still spending $10,000 per month. Your credit utilization ratio has just increased to 50 percent, which is extremely high. Unless you cut your spending, the ratio will remain high.
You can improve your credit utilization ratio by paying off most of your credit card balance, and by using your credit card less. There are also other options.
Alternatives to Closing a Credit Card Account
Since credit utilization is such a big factor in a credit score, it can make sense to not close a credit card and use other options.
In addition to using a card less or not at all, you can call your credit card company and ask it to waive the annual fee. The company’s retention department is likely interested in keeping you as a customer instead of cancelling your card because it’s cheaper to retain a good customer than to try to acquire new ones. They may also offer you other incentives, such as bonus points.