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If you're thinking about closing an old credit card, make sure you first understand the potential consequences your decision could have on your credit scores. There may be cases when closing a card makes sense—when it carries a high annual fee, for instance, or is negatively affecting your financial health. But the benefits of a long-standing credit account, including its contribution to the length of your credit history and overall credit limit, often outweigh the drawbacks.
Here are some issues to consider and guidelines to follow when deciding whether to close a credit card.
How Will Closing a Credit Card Affect Your Credit?
There are two main ways closing a card can have an impact on your credit score: It can increase your credit utilization ratio, and lower your average account age.
Your credit utilization ratio, or the amount of credit you're using compared with the amount that's available to you, is one of the most important factors in your scores. Experts say keeping your credit utilization ratio under 30% should be your goal, but the lower, the better. Those with the highest credit scores tend to have utilization ratios in the low single digits. For example, if your credit limit is $1,000, keep your outstanding balance under $300—even better, under $100. Better still, pay off your balance in full before your bill comes due.
To determine your current credit utilization ratio, add up all your credit card balances and divide that by your total credit limit. For example, if you have three credit cards with limits of $5,000, $2,000, and $3,000 each, your total credit limit is $10,000. If your current balances across all your credit cards total $3,000, that means your credit utilization ratio is 30%.
If you close the credit card with the $3,000 limit, your total credit limit will fall to $7,000. And if your balances stay the same, your credit utilization ratio will shoot up to 43%—potentially dragging your credit scores down.
Before closing any account, calculate your total current credit limit, including any new credit lines you've added. If closing an account would bring your utilization ratio close to or above 30%, consider keeping the line open or paying down your card balances.
Requesting an increase on another one of your credit lines is an option if you do decide to close an account. Be careful, though: Requesting an increased credit limit could potentially appear on your credit report as an inquiry—though this is not always the case. Hard inquiries can result in a slight drop in your score (if it affects your score at all), so it's wise to avoid unnecessary inquiries. This is especially true if you're in the market for a big loan soon, like a mortgage, when every point in your score counts.
Another factor that impacts your credit scores is the age of the accounts on your credit report. The older the accounts, the higher your scores. This factor should be less of a worry, however, since accounts closed in good standing remain on your credit report for 10 years after they're closed. Still, closing an account you've had for a long time could eventually have a negative impact since it can lower the average age of your accounts once it does fall off.
When Does It Make Sense to Close a Credit Card?
If you have a rewards credit card with a high annual fee, the question to answer is whether you use the card strategically enough to make the fee worthwhile.
Say you have a co-branded card from an airline you fly with often. Even if you don't plan to put your primary spending on that card, paying a $99 annual fee could be worth it if the card gets you free checked bags and other airline perks when you travel.
But if you're paying a hefty fee and not using any of the card's perks, don't continue to pay it just to keep the credit line open. Instead, call your issuer and ask if they can convert the account to a different card that doesn't come with an annual fee. If they're willing to do so, it could help you maintain the same credit limit, preventing the closure from affecting your credit utilization ratio.
How to Close a Credit Card the Right Way
If you've decided that canceling a credit card is the right move for you, take these steps first.
- Redeem rewards. Closing an old rewards card might cause you to forfeit any reward points you might have already accrued, so use your points before you lose them. Depending on the card's terms, you may be able to redeem them as cash back or gift cards. Some cards also give you a 30- or 60-day grace period to use your points after closing the account. Check the details of the specific card and rewards program to confirm the issuer's policy.
- Pay off any balances. You'll be responsible for any outstanding credit card balances whether or not you pay them off before closing the account. In other words, canceling a credit card won't make that debt disappear. If you're not sure you can afford to pay off the balance in one lump sum, consider moving it to a balance transfer credit card (be warned you'll typically pay a fee to do so). That can give you more time to get rid of the balance, and could even mean paying zero interest for a number of months, though you'll now have another credit account to manage.
- Inform any authorized users on the account. When you close a credit account with an authorized user on it, that person's score could be affected. If they have no other accounts, for instance, losing your account's history would leave them with no credit history (until they open a new account of their own, and even then, it will take about six months to produce a new score). That's not a reason to avoid closing your account if it's the right choice for you. Let your authorized user know what to expect, and give them a heads-up if possible so they can take steps to strengthen their score by other means. You may even choose to add them as an authorized user on another one of your accounts.
Alternatives to Canceling Your Credit Card
If you're not ready to cancel a card, you have options. First, contact your issuer and let the company know you're interested in remaining a customer but that you no longer want to use this particular credit account. You could downgrade to a card within the same network that has no annual fee. Ask the issuer how it will treat any rewards you've accrued on your previous card. Or you could request an interest rate reduction, which could help you make a dent in any balance you're carrying and make the account less pricey to maintain.
Maybe you want to close a credit card because it's tempting you to spend more than you normally would. Curbing that temptation is a solid reason to get rid of a card, but if you're worried about the impact on your credit scores of closing the credit line, limit your access to it in other ways. Take it out of your wallet and keep it in a drawer where you won't see it daily. Some have even taken to literally "freezing" a credit card in a block of water they keep in their icebox. You don't have to go that far—just put it in a place where you won't encounter it daily and be encouraged to use it.
There is one caveat, however, when it comes to keeping cards open that you don't use. Card issuers may notice that you're not spending anything on them and close them or decrease their credit limit due to inactivity. Such actions can still negatively impact your credit scores. So if you're keeping a card around in order to maintain your credit scores, be sure to use it once in a while—just pay it off immediately to avoid any credit card interest.
Deciding Whether to Close a Credit Card
Like many financial decisions, there are lots of considerations to weigh when you're looking into canceling a credit card. Your decision will be a personal one based on your spending habits, credit history and rewards earnings. But know that there are options as long as you advocate for yourself with your credit card issuer and approach the decision strategically.