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Does Closing a Credit Card Hurt Your Credit?

Closing Credit Card

There are several reasons why you may choose to cancel a credit card. Perhaps you’re sick of paying the annual fee, you no longer need it, or you’re ready to switch to a card with a better rewards program. But wait a minute: Closing a credit card might harm your credit score, particularly if the account has been operating for many years and is in excellent standing.

Here’s everything you need to know about how credit card closure impacts your credit.

How Closing a Credit Card Will Affect Your Credit Score

Closing a credit card may have a number of consequences on your credit score.

To begin with, closing a credit card account results in the loss of the account’s authorized credit limit. This raises your credit utilization ratio, or the proportion of available credit you’re using, which lenders see as a risk since it indicates you’re utilizing a larger portion of your available credit. Experts advise keeping your utilization rate around 30%, and in general, the lower the percentage, the better. Divide the sum of all your credit card balances by the total of all your credit limits to get your credit usage ratio; the resultant percentage is your utilization ratio.

Closing a credit card may also have a derogatory impact on your credit score since it reduces the average age of accounts on your credit report, particularly if the account has been active for a long period. Your credit score considers the age of your accounts, with longer payment records improving your credit score. This should not be the reason for immediate alarm, however, since accounts closed in good standing remain on your credit report for ten years and are incorporated into credit ratings for the duration. Closed accounts that have missed payments will appear on your credit record for seven years.

While your credit scores may drop temporarily after canceling a credit card, they will usually rise again in a few months if you continue to make on-time payments. It becomes clear that you just terminated an account and did not incur additional debt, but this may take some time. So, if you intend to apply for additional credit, such as a mortgage or vehicle loan in the coming months, don’t cancel a credit card.

When Is It a Good Idea to Close a Credit Card?

There are a few instances when canceling a credit card makes sense. As an example, suppose:

  • The yearly charge is exorbitant, and the perks aren’t worth it to you.
  • The card’s interest rate is high, and you must carry a balance.
  • You are having difficulty managing your debt and fighting the desire to live above your means using the card.
  • You wish to swap a basic card, such as a student or secured card, for a normal or rewards card.

When It’s Better to Keep the Card

On the other hand, there are times when it is better to keep the account open, such as when:

  • It’s your credit report’s oldest account.
  • You don’t have many other open credit accounts, which might result in a thin credit file, making future credit more difficult to get.
  • You’re just canceling it because you don’t use it very much.

How to Close a Credit Card Safely

If you’ve concluded that canceling your credit card account is the best option for you, follow these steps to avoid complications:

  1. If you have an outstanding debt, contact your credit card company and work out a payment plan. Before canceling the card, if at all feasible, pay it off.
  2. If you have a rewards credit card, be sure to redeem any unused points so they don’t go to waste.
  3. Contact customer service and inform them that you want to cancel the account, and request that they confirm it in writing. Request that it be documented that the account was closed due to your request.
  4. Send a brief note to confirm your cancellation in writing. Include your name, phone number, address, credit card account number, and any facts regarding your conversation with customer support in this letter. Make a notation indicating the account should be cancelled at your request, and keep a copy on file just in case. It may take a few weeks for your request to be completed, but if you haven’t received a confirmation letter within a month, contact your credit card company.
  5. If your credit card is linked to any automatic payments, such as your mobile phone bill or Spotify account, go through those accounts and alter your payment information to another method so you don’t miss any payments by mistake.
  6. If you have any authorized users on your credit card account, notify them that the account is being closed and request that they destroy their card.
  7. It’s now up to you to properly destroy your credit card. Put your shredder through its paces if it can shred cards. If not, carefully break up the card and try leaving parts of it in separate garbage bags around your house to make it more difficult for a prospective thief to discover and piece together your credit card information.

Alternatives to Canceling a Credit Card

If you’ve decided it’s worth it to retain your card to boost your credit, there are a few things you can do to address the concerns that were causing you to want to cancel it.

If you have a credit card with a high annual cost, contact your issuer and ask if they would consider decreasing or waiving the fee for a year. Some credit card companies are prepared to do this in order to keep clients.

If you’re afraid of overspending or going further into debt if you retain the card, hide it someplace safe or even freeze it in a block of ice. If you’re having trouble resisting the temptation, some issuers may allow you to stop your credit card account, which means it can’t be used by anybody but isn’t closed. Inquire with your issuer’s customer service to see whether this is a possibility.

If you wish to deactivate the card because you seldom use it, keep it alive by charging it with one modest transaction each year or a tiny recurring monthly fee, such as your Netflix service. Just make sure you don’t forget about it, and always pay it off as soon as possible to avoid incurring interest. Because some issuers may automatically terminate a card if there is no spending activity for a year, this will assist keep your account open and active without you having to worry about it too much.

Check Your Credit Before Closing an Account

Closing a credit card account may make sense in certain situations, but it’s vital to note that it might have a negative impact on your credit score. Before you shut your account, check your credit report to determine where you are and to ensure that closing the account will not leave you with a credit history that is too thin or too fresh. While the negative consequences of canceling a credit card account are typically brief, it may be worthwhile to keep a long-standing account active if possible.

1 thought on “Does Closing a Credit Card Hurt Your Credit?”

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