How Closing Credit Cards Could Hurt — Not Help — Your Credit

Brendan Harkness

Brendan Harkness

Updated Aug 10, 2018

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Whether you have a card you never use or a pull-your-hair-out experience with a particular card issuer, there will probably come a day when you want to close a credit card. But before getting worked up, calling your credit card company, and canceling your card, be sure you understand the consequences.

Closing credit cards could lower your credit scores — but in a few cases, it’s a wise move.

Read on for reasons why you shouldn’t close a credit card account, plus two situations when you should, and how to do so safely.

How Closing Credit Cards Affects Your Credit

There are two major ways closing a credit card can negatively impact your credit scores:

  1. It reduces the age of accounts
  2. It reduces how much available credit you have

Age of Accounts

When it comes to credit scores, longer credit history is better.

Credit scoring models, like FICO scores, consider many factors, including:

  • How long it has been since you opened your oldest account
  • The average age of all your credit card accounts

Closed accounts will continue to appear on your credit reports for up to 10 years after they’re closed. They’ll continue to age throughout those 10 years, which is good for your credit scores.

If you think closing an old credit card will erase bad payment history, think again. It’s not a magic wand: payment history, including late payments, will also remain on your reports and affect your scores after you close an account.

After 10 years, closed accounts will no longer show up on your credit reports. That means you’ll lose out on the potential value of the age of the card, so it’s better for your credit to keep older accounts with on-time payment history open for as long as you can.

Credit Utilization

Another important factor in calculating your credit scores is your credit utilization ratio, which compares your total available credit to your total balance (or total credit card debt). In general, the lower your utilization ratio, the better your credit scores.

When you close a credit card, you reduce your total available credit. This increases your utilization rate, which has a negative effect on your credit scores.

Here’s an example:

  • You have four credit cards with credit limits of $3,000 each, making your total credit limit $12,000. If you carry a $1,000 balance on three of those cards, your total balance is $3,000 — and your credit utilization rate is 25% ($3,000/$12,000 = 0.25).
  • If you close your unused card, you’ll reduce your total available credit to $9,000. So, assuming your balance stays the same, your new credit utilization rate will be worse: 33% ($3,000/$9,000 = 0.33).
Want to learn more about utilization and how the amount you pay impacts your credit scores? Here’s everything you need to know about how paying a credit card works.

The negative impact of closing a credit card varies depending on the other accounts you have on your credit reports. Generally, the more credit accounts you have, the higher your credit limits are, and the longer the credit history is on your other accounts, the less likely you are to see big credit score changes from closing a card.

Why You Should Leave Credit Cards Open

Don’t plan to use your credit card in the near future? That doesn’t necessarily mean you should close it.

Here are five reasons why it’s a smart idea to keep credit cards open:

  1. Your card will continue to age: As you now know, older accounts on your credit reports mean better credit scores. If a card’s not costing you money, why close it?
  2. Your credit utilization rate will stay the same: Having a card you don’t use will increase your overall credit limit, helping to keep your utilization down when you use other cards.
  3. You’ll maintain variety: Credit scoring models like to see a variety of accounts on your credit reports, including credit cards and installment loans.
  4. You’ll have a backup credit line: It can be pretty useful to have a credit line of a few thousand dollars tucked away for emergencies.
  5. You’ll have access to benefits: Besides basic rewards like points or cash back, your card may also have extra benefits and features you don’t want to lose. (Think: shopping and travel protections and discounts, access to high-end entertainment and services or brand-specific benefits.)

By paying your balance in full each billing period, you’ll completely avoid interest charges — and continue to reap the benefits. And best of all, cards without annual fees won’t cost you a cent.

If you really don’t want to use your card anymore, consider putting it in a safe spot instead of closing it. That way, it’ll be there if you need it — but won’t tempt you like it would in your wallet.

For more on the benefits of having more than one credit card, check out our Q&A video on the value of carrying multiple credit cards.

Issuers May Close Inactive Cards

One of the ways card companies make money is through swipe fees when people use their cards.

Maintaining an account costs credit card companies some overhead, so if they’re not making money from you they may close your unused card for inactivity.

You can usually avoid this by using your card at least once every six months.

Earlier we mentioned that closed accounts stay on credit reports for up to 10 years from the time the account is closed. Even if a credit card issuer eventually closes your account for inactivity, your credit will likely be better off than if you proactively closed the card yourself: You may have several more months or years between when you considered closing the card and when the issuer actually starts the 10-year clock by closing it for inactivity.

When You Should Close a Credit Card

Although there are many reasons to keep your cards open, there are also some good reasons to close your credit cards.

You should consider closing a card if you find yourself in the following scenarios:

1) Not Enough Value from the Annual Fee

If you have an unused card that comes with an annual fee, it’s probably wise to close it.

Unless you’re earning enough rewards or benefits to make up for the annual fee — which is unlikely if you’re not using it — your card is costing you money instead of providing a valuable service.

If you want to replace the card to continue building credit, opt for one of the many cards without an annual fee.

2) Another Sign-Up Bonus

Some travel rewards cards offer generous sign-up bonuses for opening a new card: 50,000 points, for example, after you spend $3,000 in the first three months.

Though these offers are sometimes limited to once per person per lifetime, others give you the chance to get the bonus again after a year or two.

If you already got a sign-up bonus with a card, but you’re not getting value from the card anymore, consider closing it if you might be able to get an introductory bonus again in the future. It may come in handy when you’re planning a trip, or your lifestyle changes and you’re traveling more. Just read the terms and conditions carefully before going this route.

Closing a Card With a Balance

If you’re carrying a balance on a card and want to close it, you’ll need to pay off the debt first. We recommend the avalanche method.

You don’t need to close your card just because it has a high interest rate, though. You could consider transferring the balance to another card with a lower interest rate. Some cards are designed for this purpose, with a long 0% introductory APR on balance transfers.

When you transfer a balance, there’s no need to close the card you transfer a balance away from — as long as it has no annual fee you’re probably better off leaving it open with a $0 balance and not using it.

How to Safely Close a Credit Card

Decided that closing a credit card is the right move for you?

Here’s how to do it the right way, so it has the fewest negative consequences on your credit reports.

  1. Completely pay off the credit card balance (and, if the rewards are card-specific — i.e. Chase Ultimate Rewards points instead of Delta SkyMiles — be sure to redeem them so you don’t lose them).
  2. If you have another card from the same issuer, ask to transfer the old card’s credit limit to the card you’re keeping (therefore maintaining the same amount of total available credit).
  3. To improve your credit utilization ratio, ask for credit limit increases on any cards you don’t close — or make additional payments to reduce their balances.
  4. Close your card by calling the number on the back (find customer service department phone numbers here). You can also request a freeze on your card to prevent new payments from being made on it.

Closing a card may take some time, so be patient.

I wasn’t really benefitting much from my Starwood Preferred Guest American Express anymore, so I decided to close it to avoid the annual fee. Before I closed it, I called American Express and asked if they could transfer the $11,000 credit limit to one of my other American Express cards. That worked, so I ended up with a $19,000 credit limit on another American Express card that previously only had a limit of $8,000. This kept my credit utilization the same even though I closed a card.

– John Ganotis, Founder, Credit Card Insider

Intelligent credit use sometimes — but not often — means closing credit cards that aren’t working for you.

Weigh the pros and cons first. If you decide it’s time to part with a certain piece of plastic, be sure to follow the above steps to minimize any damage to your credit.

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