Increasing your credit score can seem like a complicated process. After all, it’s created by an intricate algorithm that weighs each item on your credit report in various ways.
Many blogs and financial experts tout that all credit cards as bad. They may have you tempted to close all of your credit cards to boost your credit scores.
But before you do, you need to know how closing a credit card affects your credit history. Closing a credit card account may hurt your credit score, but it’s not as simple as you may think.
Should I cancel my credit card?
Canceling a credit card is generally a bad idea, especially if it’s an old account. It’s usually better to keep the account open even if you don’t use it anymore. This is because your credit score is heavily influenced by the average age of all your revolving credit accounts.
Keep reading to learn how closing a credit card can hurt your credit score.
Length of Your Credit History
With most credit scoring models, your credit score will rise in this category as your credit card accounts age. In fact, with FICO, 15% of your FICO score depends on how old your accounts are. As long as you have accrued a substantial credit history, you will score well in this category.
Consequently, you limit the number of accounts used in the calculation when you close a credit card. However, it doesn’t happen instantly. After a credit card account has been closed, it continues to age for ten years before dropping off your credit report.
So, your credit score won’t drop right away. Even if you close a brand new credit card, if it’s a positive account, it will remain on your credit report for ten years. However, new cards will lower your credit score because the average age of your accounts has decreased.
Credit Utilization
Another way you can hurt your credit score by closing a credit card is your credit utilization ratio. This term refers to the amount of credit card debt you owe compared to the amount of credit available to you.
For example, if you owe $2,000 on a credit card, but have three different cards with credit limits totaling $10,000, then your credit utilization ratio is 20%. But if you close one of those cards that has a $3,000 credit limit, you bring your total available credit down to $7,000.
When you recalculate your credit utilization ratio, it jumps up to 28.5%. Having a higher credit utilization negatively affects your credit. It’s also a red flag to lenders that you may not have a lot of credit left to use.
How much does closing a credit card hurt your credit score?
It could cause a pretty significant drop in your credit scores. It depends on how old your credit card account is, how many other credit cards you have, and how old they are.
If you have recently closed a credit card, it’s worth contacting the creditor and asking if they can re-open it.
How many credit cards should you have?
There’s no definite answer to this question, and it largely depends on how you handle your credit cards. Keep low or zero credit card balances, particularly compared to your overall credit limits and the amount of income you earn. If you do so, having several cards won’t affect your credit too much or your ability to get a loan or mortgage.
In fact, having more than one card lowers your credit utilization rate because you have more credit available to you. This is great for your credit scores as long as you don’t charge up the cards too much.
New Credit
Having numerous credit cards can decrease your credit score if you open too many accounts in a short period of time. This is because part of your credit score is determined by “new credit,” accounting for a full 10%.
Each time you open a new credit card or apply for a loan, it shows up in the “Inquiries” section of your credit report. Credit inquiries stay on your credit report for up to two years.
Your credit score will also take a dip for one year after each hard inquiry. If you just open one credit card account, your credit score won’t drop too much. But if you open many cards at once, you could potentially do some real damage to your credit.
Remember that retail cards at store chains also count in this section. So, be wary of opening numerous credit cards just to get a small discount or a one-time bonus at a store you rarely visit.
Credit Mix
Finally, another 10% of your credit score considers the different types of credit you have. If you have several credit cards or other types of revolving credit, but little or no installment loans like a mortgage or car payment, your credit could suffer even more.
Installment loans are weighted more favorably than revolving credit. So, it’s not good to overload on the number of credit cards you have, especially if you don’t have any installment loans at all.
Which credit cards are best to close?
There are a few things to consider before you cancel a credit card, for best results. Think about closing your newest accounts first. That way, your overall age of credit won’t take a big dip when the credit card comes off your credit report in ten years.
For the same reason, it’s best not to close the oldest account on your credit report.
High Interest Rate Credit Cards
If you tend to carry balances on your credit cards, you can also close the card with the highest interest rates. Of course, you’ll need to pay off the credit card in full before closing it.
If you do have a balance, you could try doing a balance transfer to a low-interest credit card or even a card with a 0% introductory rate. Just be certain you can pay off the credit card balance before the introductory period ends. Otherwise, you could potentially end up paying an even higher interest rate than before.
Credit Cards with High Annual Fees
Other good credit card candidates to consider closing include any with a high annual fee. Perhaps the first year’s annual fee was waived for new customers, and you received some sort of rewards points bonus.
However, if the rewards program is lucrative enough to pay for the annual fee, you might not want to close it. You may first want to call the credit card issuer and ask if you can downgrade your credit card to one with no annual fee. You may be able to switch to another credit card from the same credit card company and keep your payment history.
Credit Cards with No Rewards or Benefits
Similarly, any credit card that doesn’t offer any benefits or rewards could be a good one to close. You’ll want to consider any detrimental effects it might have on your credit utilization.
With decent credit, you should be able to find a card with a rewards program that offers free travel or cash back.
What’s the best way to close a credit card?
When you cancel a credit card, go into it with an intelligent strategy to minimize any damage to your credit scores. For example, if you’re closing more than one credit card account, try to space them out over time.
That way, your credit utilization ratio won’t drop overnight. Each new credit card account causes a small drop in your credit score for about 12 months. So, if you intend to open new credit card accounts, try to spread them out.
It’s also important to avoid canceling a credit card account right before applying for a mortgage or other loan. Even if your higher credit utilization only drops your credit score a few points, it can greatly affect what interest rate your lender offers you.
The cutoff point for the very best rates is typically 740. So if your credit score is right on the line, even a minor change can cause you to lose the best loan terms.
Closed at the Consumer’s Request
Make sure to tell credit card issuers that you want your credit card to be reported to the credit bureaus as “closed at consumer’s request”. Credit card accounts should be closed by the person who opened them. It will hurt your credit score if it appears that the credit card issuer closed the account instead of you.
Furthermore, you should expect that a customer service representative will try to convince you that another credit product is better. Don’t give them personal details about your reasons for closing the account. Simply be firm about your intentions. Again, let them know you want your credit report to reflect that you requested the account to be closed.
You don’t need a credit monitoring service to understand how opening and closing a credit card affects your credit. With this knowledge, you can strategically manage your credit card accounts to get the best possible credit scores.
The way you use your credit cards accounts for 35% of your credit score. So, regardless of where your credit score stands, there’s likely always room to improve. Make sure you consider the long- and short-term effects of any decisions you make regarding your credit cards.
