The Impact of Closing Credit Card Accounts on Your Credit Score

Closing a credit card account might seem like a simple way to manage your finances, but it can have a significant impact on your credit score. Whether you’re considering closing a card because of high fees, to reduce the temptation of overspending, or because you no longer use it, it’s important to understand how this decision can affect your financial health. In this article, we’ll explore the factors that influence your credit score when you close a credit card and provide tips on how to minimize any potential negative effects.

1. Understanding How Credit Scores Are Calculated

Before diving into how closing a credit card impacts your credit score, it’s helpful to understand the key factors that determine your score. Most credit scores, including FICO scores, are based on the following categories:

• Payment History (35%): Your track record of making on-time payments is the most important factor in determining your credit score.
• Credit Utilization (30%): This refers to the amount of credit you’re using relative to your total available credit. It’s recommended to keep this ratio below 30%.
• Length of Credit History (15%): The age of your credit accounts and the average length of time they’ve been open contribute to your score.
• Credit Mix (10%): Having a diverse mix of credit accounts, such as credit cards, mortgages, and auto loans, can boost your score.
• New Credit (10%): Opening multiple new accounts in a short period or frequently applying for new credit can negatively affect your score.

2. Impact on Credit Utilization Ratio

One of the most immediate ways closing a credit card affects your score is by altering your credit utilization ratio. This ratio is calculated by dividing your total outstanding balances by your total available credit. When you close a credit card, you reduce the total amount of credit available to you, which can increase your credit utilization if you carry balances on other cards.

For example, if you have two credit cards, each with a $5,000 limit, your total available credit is $10,000. If you carry a balance of $2,000, your credit utilization ratio is 20%. However, if you close one of those cards, your available credit drops to $5,000, and your utilization ratio jumps to 40%, which could negatively impact your credit score.

How to Minimize the Impact:

• Pay off balances: If possible, pay down the balances on your other credit cards before closing an account to keep your utilization ratio low.
• Request a credit limit increase: If you close a card and your utilization ratio rises, consider asking for a credit limit increase on one of your remaining cards to offset the reduction in available credit.

3. Length of Credit History

Another important factor is the length of your credit history, which accounts for 15% of your score. This includes both the age of your oldest account and the average age of all your accounts. Closing an account—especially one you’ve had for a long time—can reduce the average age of your credit accounts, which may lower your credit score.

It’s important to note that even after closing a credit card, the account will remain on your credit report for up to 10 years, so the immediate impact may be minimal. However, once it’s removed from your report, your average credit age may drop, which could affect your score in the long term.

How to Minimize the Impact:

• Keep older accounts open: If possible, avoid closing your oldest credit cards, as they contribute positively to your length of credit history.
• Close newer cards first: If you need to close a credit card, prioritize newer accounts that haven’t been open as long.

4. Impact on Credit Mix

Having a healthy credit mix—the variety of credit accounts you have, such as credit cards, mortgages, and installment loans—can positively influence your score. Credit scoring models like to see that you can responsibly manage different types of credit. While closing a single credit card may not have a significant effect on this factor, if you rely on credit cards as your main form of credit, reducing the number of open accounts could negatively affect your credit mix.

How to Minimize the Impact:

• Maintain a balanced credit mix: If credit cards are the only type of credit you have, try to keep a few open to maintain a diverse credit portfolio.

5. Reducing New Credit Inquiries

On the plus side, closing a credit card can help reduce the temptation to apply for new credit. Frequent credit inquiries and opening too many accounts in a short period can lower your score, as it suggests you may be taking on more debt than you can handle.

However, closing a credit card that you rarely use won’t remove any inquiries that were made when you originally opened the account. These inquiries stay on your credit report for two years but have a diminishing effect on your score over time.

How to Minimize the Impact:

• Limit new applications: If you close a credit card, avoid applying for new credit too soon to prevent multiple hard inquiries from affecting your score.

6. What If You Close a Card with an Outstanding Balance?

If you decide to close a credit card with an outstanding balance, the card issuer will require you to continue making payments until the balance is paid off. Closing the card doesn’t eliminate your obligation to repay the debt, and it won’t immediately impact your credit score. However, it’s important to continue making on-time payments, as late or missed payments can significantly harm your score.

How to Minimize the Impact:

• Keep making payments: Even if the card is closed, continue to pay at least the minimum amount on time each month.
• Consider transferring the balance: If the interest rate is high, you may want to transfer the balance to another card with a lower rate or a 0% balance transfer offer. Just be cautious about the impact on your utilization ratio if you transfer a large balance.

7. Alternatives to Closing a Credit Card

If you’re thinking about closing a credit card but are concerned about the potential impact on your credit score, consider these alternatives:

• Downgrade the card: Many issuers allow you to switch to a no-fee version of a card, which lets you keep the account open without paying an annual fee.
• Lock the card away: If overspending is an issue, you can keep the card in a safe place and avoid using it, while still benefiting from its positive effect on your credit score.
• Use it for small, recurring purchases: To keep the account active, use the card for small recurring expenses, such as a subscription service, and set up automatic payments to avoid late fees.

Final Thoughts

Closing a credit card can have both short-term and long-term effects on your credit score, primarily through changes in your credit utilization ratio and the length of your credit history. While there are valid reasons to close a card, it’s important to carefully consider how it might impact your overall credit health.

If you decide to close a credit card, try to pay off any outstanding balances, keep your credit utilization low, and avoid closing your oldest accounts. By taking a thoughtful approach, you can minimize the impact on your credit score and stay on track with your financial goals.