Does Closing a Credit Card Hurt Your Credit Score?

Understanding the Impact of Closing Credit Cards on Your Credit Score

Closing a credit card can have a significant impact on your credit score, and this is true for both unsecured and secured credit cards. The good news is it’s not always a negative. Understanding how credit scoring works can help you decide when to keep a card open and when closure might be okay.

When you’re ready to close your credit card, here’s the best way to do it

The Basics of Credit Scores

How credit scores work. Credit scores, commonly calculated by agencies such as FICO or VantageScore, serve as a numerical representation of an individual’s creditworthiness. They are influenced by various factors, including payment history, credit utilization, length of credit history, types of credit accounts, and recent credit inquiries.

Here’s how closing a credit card can affect your score:

  • Credit Utilization Ratio: This ratio compares your credit card balances to your total credit limits. Closing a card reduces your total credit limit, which can push your utilization ratio up if you carry a balance on other cards. A high utilization ratio (ideally below 30%) can lower your score.
  • Average Age of Accounts: Your credit history length is a factor in your score, with longer histories generally being better. Closing an older card can decrease your average age, potentially lowering your score.
  • Credit Mix: Having different credit products (credit cards, loans) can improve your score. Closing your only credit card could lessen your credit mix.
  • Payment History: Closing a credit card doesn’t directly impact your payment history. However, if the closed account had a history of on-time payments, it could indirectly affect your score over time as that positive history ages off your credit report.

Secured Cards and Closure:

Secured cards require a security deposit that becomes your credit limit. They are a great way to build credit, especially for those with limited credit history. Closing a secured card can have the same impacts as closing a regular card on your score.

Should You Close a Credit Card?

Here are some scenarios to consider:

  • High Fees: If you’re paying annual fees that outweigh the card’s benefits, consider closure.
  • Temptation to Overspend: If the card tempts you to overspend, closure might be wise.
  • Found a Better Card: If you have a new card with better rewards or lower fees, consider closing the old one, but only if you won’t significantly impact your credit utilization.

Minimizing the Impact:

  • Pay Down Balances: Before closing any card, ensure all balances on your remaining cards are paid to zero. This keeps your credit utilization ratio low.
  • Keep Older Cards Open: If you have multiple cards, consider closing newer ones instead of older ones to maintain a longer average credit history.

When closing a card makes sense:

Sometimes it’s okay to close a credit card, even though it might ding your credit score. There are certain situations when it just makes sense. So, if the card costs too much each year or if you’re not using it wisely, it might be a good idea to close it. Also, if your credit has gotten better and you can now get an unsecured card with better terms, it might be a good idea to close the secured card.

Closing a card occasionally may not derail your progress, but it’s wise to understand the potential consequences first.

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