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 extremists tout that all credit cards as bad. They may have you tempted to close all of your credit cards to boost your credit score.
But before you do, stop what you’re doing and find out how closing a credit card affects your credit score. It’s not as cut and dry as you might think, and you might end up hurting your credit score by closing any or all of your credit card accounts.
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 a big part of your credit score is determined by the 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
The older your credit card accounts, the higher your credit score will be in this category with most credit scoring models. In fact, with FICO, 15% of your credit score depends on how old your accounts are. This is an easy category to score high in because it’s not dependent on any other type of financial decision you’ve made — as long as you have taken the time to accrue a substantial credit history.
Consequently, you limit the number of accounts used in the calculation when you close a credit card. However, it doesn’t happen instantly. Each credit card account continues to age for ten years after it’s been closed before finally dropping off your credit report at the end of that period.
So your credit score won’t drop right away. Even if you close a brand new credit card, it will be ten years old by the time it falls off your credit report. If you’ve opened any new cards since then, your credit score will take a dip because the average age of your accounts has decreased.
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, 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 score. 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.
Having several 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 and stays there for two years.
Your credit score will also take a dip for one year after each 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 several credit card accounts just to get a small discount or a one-time bonus at a store you rarely visit.
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 card accounts are best to close?
When you cancel a credit card, there are a few things to consider to have the best effect on your credit score. First, think about closing your newest accounts. That way, your overall age of credit won’t take a big dip when the credit card comes off in ten years.
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 sure 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 Annual Fees
Other good credit card candidates to consider closing include any with an annual fee. Perhaps the first year’s fee was waived for new customers, and you received some sort of rewards point bonus.
Of course, if your rewards program is lucrative enough that it more than pays for the annual fee, you don’t necessarily want to close this one. You may first want to consider calling the credit card issuer and asking 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.
However, if you have decent credit, you should be able to find a credit card that offers a rewards program that could earn you cash back or free travel.
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. The same advice applies when opening a new credit card account since each new account causes a small credit score drop for 12 months.
It’s also important to avoid canceling a credit card account right before applying for a mortgage or other loan. Even if your lower credit utilization only makes your credit score drop by a few points, that can make a huge difference in which interest rates you’re offered by your lender.
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 very best loan terms.
Closed at the Consumer’s Request
You should also be sure to close all credit accounts on your own terms. That means don’t wait for your bank to close an account because of payment issues. That will hurt your credit score even more.
Also, be aware that any customer service representative you speak to will likely try to convince you that another credit product would work better for you. Don’t give them personal details about your reasons for closing the account. Simply be firm about your intentions. 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. You’re now armed with the knowledge you need to strategically manage your credit card accounts to get the best possible scoring in the relevant categories.
With a full 35% of your credit score affected by how you use your credit card accounts, there is certainly room for improvement no matter where your number is currently. Before you make any move regarding your credit cards, remember both the long-term and short-term effects those decisions could have on your credit.