Published in: Credit Cards | Nov. 19, 2018

Is It Bad to Close a Credit Card?

There are some good reasons to close a credit card, but there are some drawbacks you should know about as well.

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If you’re trying to improve your credit score or simplify your finances, it could seem like a smart idea to close an unused credit card or two. However, many people who do this are shocked a few weeks later to find that closing a credit card made their credit score fall.

Having said that, while it’s definitely true that closing a credit card can have an adverse effect on your credit score, that doesn’t necessarily mean it’s a bad idea. Here’s a rundown of why closing a credit card could hurt your credit score, some valid reasons you might want to close a card anyway, and a few alternative strategies to try if you’re worried about the impact of closing your credit card.

How does closing a credit card affect your credit score?

While the precise formula used to calculate your FICO® Score is a closely-guarded secret, we do know the general framework. Your score is made up of five categories of information, each with a specific weight:

  • 35% of your FICO® Score comes from your payment history
  • 30% comes from the amounts you owe
  • 15% comes from the length of your credit history
  • 10% comes from your new credit activity
  • 10% comes from your credit mix, meaning the variety of different types of credit accounts you have

There are a few ways closing a credit card could adversely affect your FICO® Score:

Most significant is the “amounts owed” category, which makes up nearly a third of your FICO® Score. The key point to know is that this category doesn’t put too much emphasis on the dollar amounts you owe. Instead, the much more important factor is how much you owe relative to your overall credit limits or original loan balances.

Let’s say that you have two credit cards, both with $5,000 limits. The first has a balance of $2,000 and the other has no balance at all. So, you’re using $2,000 of your total $10,000 credit line, or 20%.

Now, let’s say that you close the card with the zero balance. All of a sudden, you’re now using 40% of your available credit -- $2,000 of $5,000 -- which is likely to adversely affect your credit score.

In addition, if the card you close is one of your older ones, it could also hurt you in the “length of credit history” category. In addition to the ages of your individual credit accounts, this category considers the average age of all of your credit accounts. Closing a long-held credit card could significantly reduce your average.

Finally, if the credit card you close is your only credit card, it could hurt your “credit mix” score component as well. This is likely to have a minimal impact, and the people behind the FICO® Score say that credit mix is generally more important for consumers who don’t have much of a credit history otherwise.

How much will your score be affected if you close a credit card?

It’s tough to say how much your score could be affected. As I mentioned, the FICO formula isn’t public information, so it’s impossible to say how much an individual change could cause your score to drop.

In addition, there are many personal variables that could affect the impact of you closing a credit card. As an example, if you have 10 credit cards with a combined limit of $50,000 and close one card with a $500 limit, it’s unlikely to hit you in the “amounts owed” category very much. On the other hand, if you only have two credit cards, as in our previous example, closing one could have a much larger impact.

Having said that, closing a credit card is unlikely to cause a severe drop in your credit score all by itself. Payment history is the most important component of your score, and as long as you’ve paid the closed card on time every month, this part of your score will be just fine. Any impact is likely to be moderate, but the exact amount is impossible to predict.

4 good reasons to close a credit card

Even though doing so is likely to result in a moderate drop in your FICO® Score, there are some valid reasons you might want to close a credit card. Just to name a few of the most common:

  • The credit card you want to close is a “starter” credit card that you used to build your credit. Many credit cards designed for people with little or no credit history have extremely high APRs and fees. For example, one popular starter card charges users a $95 initiation fee, a $45 annual fee, and a $6.25 monthly maintenance fee after the first year -- plus the card has a 36% APR. If you can obtain a better credit card product now, getting rid of such a costly credit card could be worth taking a small hit to your credit score.
  • The credit card is a secured credit card and closing it would get your deposit returned. Most secured cards require a security deposit equal to the account’s credit limit, and if you can get an unsecured credit card with competitive terms, it seems silly to keep a large chunk of money tied up.
  • You no longer use the card’s benefits, and the annual fee just doesn’t make sense to pay. For example, I pay a $199 annual fee for a certain airline-branded credit card because I travel fairly often, and the benefits are well worth the cost of the annual fee. If I stopped traveling regularly, however, I’d have to re-think paying for a credit card designed for travelers.
  • Finally, another good reason for closing a credit card is if you simply don’t trust yourself not to incur excessive debt. For example, let’s say that you have a spending problem and that you just finished paying down a $5,000 credit card balance to zero. If you feel that keeping the card creates a serious risk of a future debt problem, it could be a smart move to close the card.
Of course, this isn’t an exhaustive list. There are many other potential valid reasons to close a credit card. A general rule of thumb is that if a card no longer makes sense financially, or no longer fits into your goals, it could be a good idea to get rid of it, even if doing so means a temporary hit to your credit score.

Alternative strategies to consider before you close a credit card

As a final thought, if any of the reasons to close a card that were discussed in the previous section apply to you, there could be some alternatives that are worth exploring. Just to mention a few of them:

If you have a credit card with excessive fees or a ridiculously high interest rate, call the card issuer and ask them to lower it. Recent reports indicate that the vast majority of people who attempted to get their annual fee waived and/or reduce their interest rate were successful. You might be surprised what credit card companies could be willing to do in order to keep your business, especially if you’ve been a good customer.

If you have a secured credit card, many issuers will refund your deposit (or at least part of it) after you’ve established a solid payment history. Or, they might be willing to convert your account directly to an unsecured card if your current credit profile justifies doing so. This is a better option than closing an established account and opening a brand new one from scratch, so it’s worth looking into.

Finally, if you don’t trust yourself with a zero-balance credit card, you can ask your card issuer to lower your limit. They’ll probably be glad to oblige, and while this could still hurt your score in the “amounts owed” category, the impact should be less severe than if you close the account. 

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