When you finally pay off a credit card, shutting down that account can feel like a celebration—until you see your credit score.
Maybe you are canceling a card you don’t use anymore and you’re tired of paying the annual fee. Maybe you are getting better rewards, interest rate, or cash back from another credit card issuer. Or maybe you have more philosophical reasons for closing your cards (more on that below). No matter your motivation, you should know that closing a credit card can negatively impact your credit score. Fortunately, there are some tricks to limit the hit.
It all starts with understanding the credit scoring system.
Does Closing a Credit Card Hurt Your Credit Score?
A bunch of things go into the calculation of your credit score, but the one most relevant to this issue is called your “credit utilization ratio,” or “CUR.” That’s the percentage of available credit that you’re using.
If you have three cards with $5,000 credit limits each, you have $15,000 in total available credit. Now say you have $3,000 in credit card debt, spread across two of those cards. Your total CUR is $3,000 out of $15,000, or 20%. When you close your unused credit card, you’re now using $3,000 out of the $10,000 in credit that’s left available. Your CUR suddenly jumps from 20% to 30%. That doesn’t look good to credit bureaus like Equifax, Experian, or TransUnion.
Dinging you for closing a credit card account might seem unfair, but credit card companies and bureaus are just following the statistics.
“Our analysis of millions of credit records at different points in time has consistently found that those with lower credit utilizations are less likely to default on their credit obligations in the future, than those with higher utilizations,” says Tommy Lee, Principal Scientist at FICO, one of the leading credit scoring services in the U.S.
The other thing people sometimes worry about is how long they’ve had a credit card open. It’s true that credit scores factor in the average age of your accounts and favor longer credit histories, Lee says. However, your payment history only accounts for 15% of your FICO Score. While an account closure could affect the “average age of accounts” variable, it won’t affect your total history, which includes both open and closed accounts, explains Lee. (Bottom line: According to Lee, the age of your card matters a lot less than CUR.)
The negative impact on your credit score when you are closing a card is usually modest, says Lee. However, the severity depends on a few factors. Those include the size of your debt, the limit of the credit card you are canceling, and the limits of the remaining or new cards.
The Case for Closing Credit Cards
If an open credit card has high annual fees, it makes sense to ditch it. But what if there’s no fee? Why not just keep the card open and not have to worry about credit score repercussions?
“It’s all about financial peace,” says personal finance speaker and author Anthony O’Neal. O’Neal started his own shift away from credit cards when he found himself in $35,000 of debt at age 19. Today, he doesn’t have a single credit card.
His view: For most people, having extra credit cards lying around is just a temptation to overspend. “98% of Americans say they’ll get a credit card and only use it for emergencies, or use it and pay off the total credit card balance every single month on time. 98% of cardholders don’t do that,” he says.
When it comes to financial well being, removing that temptation and committing to living within your means is more important than a good credit score, argues O’Neal, an advocate of closing all credit cards.
But if you’re just looking to downsize to one card and simplify your life—not eschew mainstream credit entirely—there are ways to do it without putting your score at risk.
How to Close a Credit Card the Right Way
If your credit score is teetering between good and poor, or if you’re already working on repairing it after an event like declaring bankruptcy, it can make sense to worry about even modest hits. Fortunately, there are things you can do to spare your score when you close a credit card.
Examine your credit portfolio
When it comes to closing cards, “You want to approach this strategically,” says Bruce McClary, Vice President of Public Relations and Communications at National Foundation for Credit Counseling. To do that, first, calculate your current credit utilization ratio. (To calculate, add up the balances of all your credit cards. Divide this number by the sum of all your credit card limits. Then multiply by 100.)
Pay off your credit card debt
“Ideally, if you want to protect yourself, pay every balance down to zero before picking the card you want to close,” says McClary. If your CUR is 0%, it’s still going to be 0% when you close a card. No jump in CUR or late payments means no credit score penalty.
If you can’t pay off your cards entirely, McClary still recommends lowering your debt as much as possible before closing a card. That will help reduce your utilization percentage.
Start with your lowest-limit card
If you have a few cards to choose from, consider closing the one with the lowest limit first, McClary suggests. That way, your CUR won’t shoot up as much.
To actually close your credit card you will want to start by calling the phone number on the back of the card to learn what the cancellation process requirements are. You may need to include written confirmation or visit the bank of the card issuer to finish closing the card.
Then, work on paying down your existing debt before you close the next card.
Keep an eye on your credit report
McClary recommends checking your credit score before and after you close a card. You’ll get an idea of the size of the impact tand how much repair you need to do. It’s also just a good habit to regularly check your credit report and dispute any errors, says McClary, especially now—during the COVID-19 pandemic, you can get weekly reports for free at annualcreditreport.com.
Disclaimer: The opinions expressed by the interview subjects are not necessarily those of Earnest.