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So, you want to cancel your credit card account? There may be some cases where it’s warranted, but you might want to think twice before you drop the account. Closing a credit card has the potential to damage your credit score. That’s why, if you are considering canceling a card, you should have a plan.
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The Main Problem with Closing Credit Cards: Credit Utilization
Canceling a credit card can turn into a credit score setback not because of the account closure itself, but because closing a credit card account might increase your credit utilization ratio. (Spoiler alert: A higher credit utilization ratio can spell trouble for your credit score.)
What is Credit Utilization?
Credit utilization describes the connection between your credit card balances and your credit card limits. The more of your total limit you use, the more it will impact your credit score.
You can calculate your credit utilization ratio using the following formula:
- Credit Card Balance ÷ Credit Limit × 100 = Credit Utilization Ratio
Credit scoring models calculate utilization by looking at the credit card balance and limit figures on your credit report, not from a real-time look at your account. Card issuers report activity to the credit bureaus just once a month. So the balance and limit on your credit report will be a snapshot of your account details on your statement closing date.
Maintaining a credit utilization ratio of 0% to 10% is best if you want to maximize your credit scores. But unless you’re planning to apply for financing in the near future, a utilization rate of less than 30% is probably sufficient.
No matter the case, you’ll want to pay your full statement balance by the due date every month to avoid expensive credit card interest and to protect your credit score and wallet from late fees. If you’re trying to keep the credit utilization on your credit report as low as possible, then the best time to pay your credit card is prior to the statement closing date.
Per-Card Credit Utilization vs. Aggregate Credit Utilization
Credit scoring models consider utilization rates for both individual credit card accounts and on all of your credit cards combined. These two figures are called per-card credit utilization and aggregate credit utilization. In both scenarios, lower credit card utilization rates are better for your credit score.
Here’s a look at the credit utilization formula in action on an individual credit card account.
| Per-Card Credit Card Utilization | ||
|---|---|---|
| Credit Card Limit | $10,000 | |
| Credit Card Balance | $7,500 | |
| Credit Utilization Ratio | 75% | |
Next, here’s an example of what aggregate or overall credit utilization might look like.
| Aggregate Credit Card Utilization | ||||||||
|---|---|---|---|---|---|---|---|---|
| Credit Card #1 | Credit Card #2 | Credit Card #3 | Totals | |||||
| Credit Card Limit | $10,000 | $5,000 | $10,000 | $25,000 | ||||
| Credit Card Balance | $7,500 | $5,000 | $0 | $12,500 | ||||
| Per-Card Utilization Ratio | 75% | 100% | 0% | Aggregate Credit Utilization Ratio:50% | ||||
How Closing a Credit Card Can Affect Credit Utilization Rates
We’ve already touched on the concept that closing a credit card can cause your overall credit utilization ratio to spike. But here’s an illustration of why that can occur. In the table below, you’ll see an example of what would happen to your credit utilization ratio if you closed Credit Card #3 (above) with its balance of $0.
| Aggregate Credit Card Utilization After Credit Card Closure | ||||||||
|---|---|---|---|---|---|---|---|---|
| Credit Card #1 | Credit Card #2 | Credit Card #3 CLOSED | Totals | |||||
| Credit Card Limit | $10,000 | $5,000 | $10,000 | $15,000 | ||||
| Credit Card Balance | $7,500 | $5,000 | $0 | $12,500 | ||||
| Per-Card Utilization Ratio | 75% | 100% | 0% | Aggregate Credit Utilization Ratio:83% | ||||
Closing your paid-off credit card in the scenario above would cause your overall credit utilization to jump from 50% to 83%. Although your debt remains the same in both scenarios—$12,500—your utilization rate increases because the closed card’s credit limit no longer acts as a cushion to help you.
It’s worth pointing out that rising credit utilization rates could be a problem regardless of who closes a credit card account. Card issuers will sometimes close credit cards due to inactivity or other reasons. Whether your credit card company closes your account or you do so voluntarily, rising credit utilization might trigger a credit score decrease.
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Another Potential Problem
In addition to the potential credit utilization issue, closing a credit card could be especially problematic for consumers who don’t have a lot of other open accounts. For such a person, closing a credit card would cause their length of credit history to drop dramatically. Which will, of course, negatively impact their credit score.
How Length of Credit History Is Impacted
Your length of credit history is the total amount of time accounts have been open in your name. You might have heard that closing a credit card will reduce the age of your credit report and harm your credit. This is only partly true.
FICO and VantageScore do consider your age of credit history when evaluating your score:
- FICO® Scores: Length of credit history is worth 15% of your FICO® Score.
- VantageScore: 21% of your score is based on your depth of credit. Your average account age is a factor within this category.
However, closed accounts—credit card or otherwise—are still counted by your FICO score in your average age of credit calculations. Closed, positive accounts stay on your credit report for up to 10 years, and up to seven years if negative. As long as an account shows up on your credit report, its age factors into your FICO Score.
VantageScore credit scores are a bit different. Certain closed accounts may not count toward your average age of credit. Therefore, a credit card closure might hurt you if a future lender uses a VantageScore scoring model to calculate your credit score.
Eventually a closed credit card will come off your credit report. When that happens, your average account age may decline as far as FICO is concerned too. At that point it’s possible you’ll see a score drop caused by your credit card closure—especially if the card you closed was your oldest account.
How To Close Credit Cards Safely
There are some legitimate reasons to close a credit card account. For example, you might want to cancel your credit card if you don’t trust yourself to use your credit card responsibly.Another reason you might want to close a card is if the annual fee on your credit card is high, and its benefits don’t offset the cost. You typically need to close joint accounts during a divorce or separation as well.
On the other hand, closing a credit card won’t remove it from your credit report. So, if you’re hoping to erase negative activity with an account closure, this strategy won’t be effective.
If you’ve done your research and believe that canceling your credit card is in your best interest, there are steps you can take to protect yourself. The steps below detail the safest way to close a credit card from a credit scoring perspective.
- Step 1: Pay off your full credit card balance and confirm that the balance is $0 with the issuer.
- Step 2: Cancel any recurring payments you have set up on the card.
- Step 3: Pay off all of your other credit cards before the statement closing date on those accounts. (If you can’t afford to pay off your credit card debt, you might consider using a consolidation loan to lower your utilization rates and potentially help you get out of debt faster.)
- Step 4: Call the card issuer to close your account. Ask for written confirmation that your account balance is $0.
- Step 5: Monitor your three credit reports to make sure the card issuer updates the account to show it is closed with no outstanding balance.
These steps should help you protect your credit score from damage when you close a credit card account. But there are other factors you should consider before you cancel a credit card, too. For example, you’ll want to redeem or transfer any credit card rewards you’ve earned so you don’t lose them. And in some cases you might want to think about downgrading your credit card account—for example, to one without an annual fee—rather than closing it outright.
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Bottom Line
In general, you shouldn’t close a credit card unless you have a good reason. A credit card cancellation will not improve your credit score, and it won’t remove a negative account from your credit report either.
If you find yourself in a position where you believe a credit card closure is necessary, be strategic about when and how you cancel your account. For example, you might want to hold off on the cancellation if you have any upcoming credit applications planned. And when you do close your account, it’s best to make sure all of your credit cards are paid off first. Following these credit-smart steps could help you avoid or minimize any potential credit score damage from closing a credit card.
