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There are many reasons why you might want to cancel 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. Here's what you need to know about how closing a credit card affects your credit. How Closing a Credit Card Will Affect Your Credit ScoreClosing 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, or the percentage of your available credit you're using, 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. To calculate your credit utilization ratio, divide the total of all your credit card balances by the total of all your credit limits; your resulting percentage is your utilization ratio. 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. This shouldn't cause immediate concern, however, since 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. It becomes evident that you just closed an account and didn't take on new debt, but it can take some time. So don't cancel a credit card if you plan to apply for other credit, such as a mortgage or auto loan, in the next few months. When Canceling a Credit Card Makes SenseThere are a few situations in which it may make sense to cancel a credit card. For example, if:
When It's Better to Keep the CardOn the flip side, there are certain circumstances when it can be wiser to keep the account open, such as when:
How to Close a Credit Card SafelyIf you've decided that it makes sense for you to cancel your credit card account, here are the steps to take so you have no issues:
Alternatives to Canceling a Credit CardIf you've decided it's worth it to keep your card around to help your credit, there are a few ways you can remedy the issues that were leading you to want to cancel the card. For credit cards with burdensome annual fees, call your issuer and ask if they would consider lowering or waiving the annual fee for a year. Some credit card issuers are willing to do this as a way to retain customers. If you're worried you'll overspend or get into more debt if you keep the card, stash it somewhere secure or even freeze it in a block of ice. If you're really struggling to resist the temptation, some issuers will let you pause your credit card account, meaning it can't be used by anyone, but it isn't closed. Call your issuer's customer support and ask whether this is an option. If you want to cancel the card because you rarely use it, keep it active by either putting one small purchase on it each year or putting a small recurring monthly charge on it—for example, your Netflix account. Just make sure you don't forget about it, and always pay it off right away so you don't get stuck paying interest. This will help keep your account open and active without you having to think much of it, since some issuers will automatically cancel a card if there is no spending activity for a year. Check Your Credit Before Closing an AccountClosing 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. Does Cancelling a credit card ruin your credit?A credit card can be canceled without harming your credit score. To avoid damage to your credit score, paying down credit card balances first (not just the one you're canceling) is key. Closing a charge card won't affect your credit history (history is a factor in your overall credit score).
Is it better to cancel unused credit cards or keep them?It is better to keep unused credit cards open than to cancel them because even unused credit cards with a $0 balance will still report positive information to the credit bureaus each month. It is especially worthwhile to keep an unused credit card open when the account does not have an annual fee.
What is the downside to canceling a credit card?Closing your credit card accounts may negatively affect both your credit score and your credit history.
Is it good to cancel a credit card?In general, it's best to keep unused credit cards open so that you benefit from a longer average credit history and a larger amount of available credit. Credit scoring models reward you for having long-standing credit accounts, and for using only a small portion of your credit limit.
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