Debt Relief

Does Closing a Credit Card Hurt Your Credit Score?

Closing a credit card account can have an impact on your credit score, but whether it’s a positive or negative effect depends on several factors. Understanding how credit scores are calculated and how closing an account affects these factors can help you make an informed decision.

1. Credit Utilization Ratio

Your credit utilization ratio is the amount of credit you're using compared to your total available credit. It’s a key factor in determining your credit score.

How Closing a Credit Card Affects This:
When you close a credit card account, you reduce your total available credit. This can cause your credit utilization ratio to increase, especially if you carry balances on other cards. Higher utilization rates can hurt your credit score because it signals that you’re relying more heavily on credit.

Example:
If you have two credit cards with a $5,000 total credit limit and carry a $2,000 balance, your utilization ratio is 40%. If you close one card with a $2,500 limit, your total available credit drops to $2,500, increasing your utilization ratio to 80%. This higher ratio can lower your credit score.

2. Length of Credit History

The length of your credit history accounts for about 15% of your credit score. This factor reflects how long you've had credit accounts open.

How Closing a Credit Card Affects This:
Closing an older credit card can shorten your credit history, which can negatively impact your score. If the card you’re closing is one of your oldest accounts, it may have a more significant effect than closing a newer one.

Example:
If you close a 10-year-old credit card, it may reduce your average account age, which could lower your score. However, if the card has no balance, this effect may be minimal over time, but it's still something to consider.

3. Impact on Your Credit Mix

Your credit score also benefits from having a diverse mix of credit types (credit cards, loans, mortgages, etc.).

How Closing a Credit Card Affects This:
If the card you’re closing is one of your only credit cards, it could reduce your credit mix, which could have a small negative impact on your credit score.

4. Effect on Your Credit Report

Closing a credit card doesn’t remove it from your credit report; it will still show as “closed by consumer” for up to 10 years. The account will continue to impact your credit history, including your length of credit history and your payment history.

How This Helps:
If the card was in good standing and had a positive payment history, it can continue to benefit your credit score for years. However, any late payments or negative information on the account can also stay on your report.

5. When Closing a Credit Card Is a Good Idea

Although closing a credit card can potentially hurt your credit score, there are situations where it may make sense:

  • No Annual Fee: If the card has a high annual fee and you no longer use it, it may be worth closing to save money.
  • Debt Reduction: If closing the card helps you reduce the temptation to overspend, it might be a wise decision, as long as you’re prepared for the potential score dip.
  • Simplifying Finances: If you have too many open accounts and find it difficult to manage them, closing a card may help reduce complexity.

How to Minimize the Impact of Closing a Credit Card

  1. Pay Off Balances First: Pay off any balances before closing the card to avoid increasing your utilization ratio.
  2. Keep Your Credit Utilization Low: If you plan to close a card, make sure you’re not overusing your remaining credit lines.
  3. Keep the Card Open: If the card has no annual fee and isn’t costing you anything, consider keeping it open to maintain a higher available credit limit.
  4. Monitor Your Credit Score: After closing a credit card, keep an eye on your credit score to assess any changes and take corrective actions if needed.

Final Thoughts

Closing a credit card can negatively affect your credit score by impacting your credit utilization ratio, average account age, and credit mix. However, if done thoughtfully and in the right circumstances, the impact can be minimal. Weigh the pros and cons before closing a credit card and consider how it fits into your overall financial strategy.

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