Does Closing a Credit Card Hurt Your Credit?
Wondering if closing a credit card impacts your credit score? It’s a common belief that canceling a credit card can harm your credit, but that’s not always the case. If you pay off all your credit card balances, not just the one you’re closing, to zero before cancellation, you can avoid a negative impact on your credit score.
Typically, it’s advisable to keep your credit card accounts open even if you’re not actively using them. However, there are valid reasons for closing an account. For instance, closing joint accounts during a separation or if your card issuer imposes high annual fees.
Read on to discover the reasons and how to effectively cancel a credit card.
Understanding the Impact of Credit Utilization Ratio
Financial experts caution against closing credit cards due to the potential negative impact on your credit score. According to Beverly Harzog, a credit card expert, canceling a credit card could lower your score.
Closing a credit card can affect your credit utilization ratio, which measures the portion of your available credit being used. Higher credit usage can lead to a decrease in your credit score.
For instance, closing a credit card with a zero balance can backfire by increasing your credit utilization ratio significantly.
Maintaining zero balances on your credit cards, especially before closing any account, is crucial to protecting your credit score and saving on interest charges.
Closing a credit card without affecting your credit score is possible if all your card balances are zero on your credit reports.
Being mindful of your credit utilization ratio can positively impact your credit score, with experts suggesting a ratio below 30%.
Good Reasons to Cancel a Credit Card
While canceling a credit card is generally discouraged, specific situations may warrant account closure. Here are three valid reasons to consider.
Separation or Divorce
Closing joint credit card accounts during a separation is advisable to avoid liability for future charges made on the account.
Even after a divorce, charges on a joint account will still hold you responsible, underscoring the importance of closing joint accounts.
High Annual Fees
Canceling a credit card with high annual fees, especially if unused, may be justified. Consider requesting a fee waiver before closing the account.
Negotiating a fee waiver with your card issuer before closure can lead to potential cost savings.
Too Much Temptation
If the temptation to overspend with credit cards is overwhelming, closing a card might be necessary. However, consider alternative strategies to manage spending impulses.
Removing credit cards from easy access can help curb the temptation to overspend, preserving your credit score.
Once a credit card is closed, reopening the account is not an option.
How to Cancel a Credit Card: 6 Steps
If you’ve decided to close an account, follow these six steps to smoothly navigate the process.
Closing a Credit Card Won’t Impact Your Credit History
Contrary to belief, closing a credit card does not immediately erase the account history from your credit reports.
According to credit expert John Ulzheimer, the value of the account age is retained in credit scoring systems as long as the card remains on your reports.
Despite closure, the account’s impact on your credit history persists for several years, contributing to your average credit account age.
FICO considers credit history as a vital factor in credit scores, emphasizing the significance of maintaining a positive credit history.
Your credit score could be affected if closing a card alters your credit utilization ratio, which gauges the credit you’re using relative to the total available credit. Aim for maintaining a utilization ratio around 30%.
To keep your utilization rate low, pay off your balances monthly to avoid accruing a substantial balance and incurring interest. Requesting a credit limit increase can also help lower your utilization rate, but exercise caution to prevent additional overspending.
Closing a card does not necessarily damage your credit history. While a closed account remains on your reports for years, it still contributes to your overall credit history.
The Bottom Line
Before closing a credit card account, ensure you have a valid reason. Managing multiple cards responsibly isn’t detrimental to your credit score, but if closing a card is necessary, focus on reducing all balances to zero to mitigate potential score impacts.
