Yes, closing a credit card can hurt your credit score, especially if it's an account you've had for a long time or one that contributes significantly to your overall available credit.
How Closing a Credit Card Can Impact Your Credit Score
Closing a credit card isn't just about reducing the number of cards in your wallet; it can have a direct, and often negative, influence on the factors that determine your credit score. This can lead to a temporary hit to your creditworthiness.
Key Factors Affected
When you close a credit card, several key components of your credit profile can be impacted:
- Credit Utilization Ratio: This is a crucial factor. Your credit utilization is the amount of credit you are currently using compared to your total available credit across all your accounts. When you close a credit card, your total available credit decreases. If you carry a balance on any of your remaining cards, your credit utilization ratio will likely increase, which is viewed as a higher risk by lenders and can negatively impact your score. For instance, if you have two cards with $5,000 limits each (total available credit of $10,000) and a $2,000 balance on one card, your utilization is 20%. If you close the card with no balance, your total available credit drops to $5,000, making that same $2,000 balance now a 40% utilization. Understanding this ratio is vital for managing your credit; the Consumer Financial Protection Bureau (CFPB) offers more insights.
- Average Age of Accounts: Credit scoring models favor a longer credit history. They consider the average age of all your open accounts. If you close an old credit card, particularly one you've maintained for years, it can lower the average age of your credit accounts. This can signal a shorter credit history, which might be seen less favorably by lenders.
- Credit Mix: While generally less impactful than utilization and age, your credit mix refers to the variety of credit types you manage, such as revolving credit (credit cards) and installment credit (loans like mortgages or car loans). Closing a credit card could possibly limit your credit mix if it was one of your few revolving accounts. However, for most people with a diverse range of credit products, this impact is often minor.
When Closing a Card Might Be Less Harmful (or Even Beneficial)
Despite the potential risks, there are specific scenarios where closing a credit card might be a reasonable decision, with minimal or manageable impact on your credit:
- High Annual Fees: If a credit card carries a significant annual fee and you no longer use its benefits, closing it can save you money.
- Redundant or Unused Cards: If you have numerous cards and wish to simplify your finances, closing a newer card with a low limit or one you rarely use might have less impact.
- Temptation to Overspend: For individuals who struggle with overspending or carrying high balances, closing a card can be a beneficial move for personal financial discipline, even if it causes a temporary dip in the score.
- Poor Customer Service or Security Concerns: If you're experiencing ongoing issues with a card issuer or have significant security concerns, closing the account might be necessary.
Strategies to Minimize Credit Score Impact
If you decide to close a credit card, you can take proactive steps to help mitigate the potential negative effects on your credit score:
Best Practices Before Closing a Card
| Action Step | Explanation |
|---|---|
| Pay Down Balances | Before closing any card, ensure you have minimal to no balances on your other credit cards. This will help keep your overall credit utilization low. |
| Transfer Credit Limit | If you have another card with the same issuer, inquire if they allow transferring a portion of the credit limit from the card you intend to close to your other existing card. This helps maintain your total available credit. |
| Open a New Card (Strategically) | If you need to maintain your total available credit, consider applying for and opening a new credit card before closing the old one. Be mindful of hard inquiries and the impact of new accounts. |
| Close Newer Cards First | If you have multiple cards you're considering closing, prioritize closing the newer accounts with lower credit limits. This helps preserve the average age of your accounts and larger credit limits. |
Additional Tips:
- Maintain Excellent Payment History: Always make payments on time for all your remaining credit accounts. Payment history is the most important factor in your credit score.
- Keep Old Accounts Active: If possible, try to keep your oldest credit accounts open, even if you use them only occasionally for a small purchase and pay it off immediately. This helps preserve your long credit history.
- Monitor Your Credit: After closing an account, regularly check your credit report and score using free services to monitor any changes and ensure all information is accurate.
Making an informed decision about closing a credit card, based on your individual financial situation and credit goals, is key to managing your credit effectively.
