There are many reasons why you might want to close a credit card. Perhaps you’re tired of paying the annual fee, you have no use for it anymore, or you’re ready to upgrade to a card with a better rewards program. But not so fast: Closing a credit card can hurt your credit, especially if it’s an account in good standing that’s been open for several years.
How closing a credit card will affect your credit score
Closing a credit card can affect your credit score for a few different reasons.
For starters, when you close a credit card account, you lose the available credit limit on that account. This makes your credit utilization ratio jump up — and that’s a sign of risk to lenders because it shows you’re using a higher amount of your available credit. Experts recommend that you keep your utilization rate under 30%, and in general, the lower the rate, the better.
Closing a credit card can also affect your score because it can lower the average age of accounts on your credit report, especially if it’s an account that’s been open for a long time. The age of your accounts is factored into your credit score, with longer payment histories bolstering your credit score. However, accounts closed in good standing stay on your credit report for 10 years and are factored into credit scores the entire time they remain. Closed accounts that have missed payments associated with them will remain on your credit report for seven years.
While your scores may decrease initially after closing a credit card, they typically rebound in a few months if you continue to make your payments on time. Don’t close a credit card if you plan to apply for other credit, such as a mortgage or auto loan, in the next few months.
When closing a credit card makes sense
There are a few situations in which it may make sense to close a credit card. For example, if:
- The card has a high annual fee and the benefits aren’t worth it to you
- The interest rate on the card is high and you need to carry a balance
- You are struggling to manage your debt load
When it’s better to keep the card
On the flip side, there are certain circumstances when it can be wiser to keep the account open, such as when:
- It’s the oldest account on your credit report
- You don’t have many other open credit accounts, which can result in a thin credit file, making it harder to qualify for future credit
- The only reason you’re closing it is that you don’t use it very often
Check your credit before closing an account
Closing a credit card account can make sense in certain circumstances, but it’s important to understand that it can adversely affect your credit score. Before your close your account, consider taking a look at your credit report to see where you stand and make sure that closing the account won’t leave you with a credit history that’s too thin or too new. While the negative effects of closing a credit card account are usually temporary, it might be worth keeping a long-standing account open if you’re able to.
For more information about the factors that can affect your credit score, see the following articles: