Here's What Happens When You Close a Credit Card

Sometimes, things just don't work out. This is true of jobs, relationships, and even credit cards. If you have more than one card, it's possible that one of them just isn't pulling its weight. Perhaps you're paying an annual fee you can't justify based on the benefits of the card. Or maybe you're struggling with managing credit card debt, and closing this account will help you tighten up your money management. If this is the case, you might consider closing the account altogether. But what will happen if you cancel that card? Let's find out.

Your credit score could take a hit

We may as well start with the worst possible consequences of closing that credit card: Your credit score could be impacted by the closure. There are a few ways this can be true. Your credit score is made up of several different factors, and each is weighted differently to calculate the three-digit number.

In the case of your FICO® Score (the most frequently used score by lenders), the amount of debt you have makes up 30% of your score. Closing a credit card means losing access to its credit limit, which forms part of your credit utilization ratio (the amount of credit at your disposal that you're actually using). So that could result in a credit score hit.

The other way you might impact your credit score by closing that card is in the length of your credit history (15% of your FICO® Score). If that credit card has been in your wallet a long time, closing it could bring down the average age of your accounts to a significant degree.

You'll lose the card's benefits

You might not be fussed about this impact of closing a credit card, because if the card's benefits were all that great, you might not be closing it. But it's important to remember that if you've amassed a pile of rewards points based on using that card, you'll lose access to them when you close the account. So be sure you use them before you close it.

You won't have to pay an annual fee anymore

Here's a nice thing about closing a credit card: If it has an annual fee, you won't have to keep paying it. And this could be a nice bonus, especially if you're not using the card enough to justify that fee dinging your checking account every year. Don't get me wrong, sometimes an annual fee is worth it -- but only if you're getting benefits from the card that outweigh its cost.

You'll have one fewer account to manage

This is another plus to closing a credit card, especially if you struggle to keep track of all your financial accounts. It's also good from an identity theft perspective. If you have fewer open accounts, that's fewer opportunities for your data to be exposed to hackers and for thieves to gain access to your account.

You may avoid temptation

Finally, if you're closing the account to limit your opportunities to overspend, the loss of this credit card will help remove some of that temptation. Closing the card could be an opportunity to limit your credit card spending to those cards that give you benefits like cash back and rewards. Or it might be a chance to take a break from credit cards while you pay off debt on other accounts. (And there's no shame in that -- we all have to do what's best for us and our finances.)

You're allowed to close credit card accounts, but it's best to approach it with an awareness of what could happen to your credit score and finances as a whole when you do. A quick note of caution: If you close a card that has a balance on it, note that you have to pay off the balance. Otherwise, the card issuer could send the bill to collections, and you don't want that (or the impact on your credit score). Consider all angles and what you stand to lose (or gain) before you close a credit card.