Is It Bad to Close a Credit Card?

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Is it bad to close a credit card? The real answer is: It depends. There are a few important steps to take to ensure closing a credit card doesn't drag down your credit score. Closing a credit card the right way can lead to minimal or no damage to your credit. Here's everything you need to know about closing a credit card.

Does canceling a credit card hurt your credit score?

The question, "Is it bad to close a credit card?" all depends on what happens to your credit score afterward. The short answer is yes, closing a credit card can hurt your credit score. The amount it lowers your score depends on your situation.

If you're carrying high balances on other cards -- or your credit history is fairly recent -- you may want to think twice about closing a credit card. Generally, if you have a long credit history or low balances on other credit cards, you can cancel one card worry-free.

Here's why: Your score benefits when you have older credit accounts. So if you're closing a credit card, try not to close your oldest card. And if your credit score is still brand new, it may not be the right time to cancel a credit account. The average age of all your credit accounts and the age of your oldest account together make up about 15% of your FICO® Score.

Your current balances also influence your score. The more you owe credit companies, the lower your score will be. This is called your credit utilization rate -- it's responsible for 30% of your FICO® Score. You can calculate your credit utilization rate by adding up how much you owe across all of your credit cards, then dividing that by your total credit limit across all credit cards. Ideally, it's good to keep your credit utilization below 30%.

Let's imagine your credit card balances add up to $5,000 and all of your credit limits add up to $20,000. Your credit utilization rate is your balances ($5,000) divided by your limits ($20,000), or 25%. Now, let's say you're closing a credit card with a $10,000 limit. When you close that card, your overall credit limit drops from $20,000 to $10,000. Your credit utilization is still your balances ($5,000) divided by your limits ($10,000), but now your credit utilization ratio shoots up to 50%. The higher utilization ratio will likely damage your score until those balances are paid down.

How to cancel a credit card

"Is it bad to close a credit card?" might not be the right question for your situation. If you're pretty sure you want to cancel a card, the right question might be "How can I close a credit card without damaging my credit?" Closing a credit card the right way can help you prevent or minimize damage to your credit score.

Follow these six steps to cancel a credit card safely:

If you're closing a credit card because of an annual fee, call customer service first. Ask if they'll waive the annual fee in order to retain you as a customer. Consider downgrading the card to a no-annual-fee version or look for a no-annual fee card.
Pay off any remaining balance before closing a credit card. If you can't do this, consider transferring the balance to a low interest rate credit card, or talking with your card issuer about a payment plan.
Redeem your rewards. If you have any remaining points, cash back, or other rewards, redeem them before closing the account so you won't lose them.
Update billing information on any automatic bill payments or recurring subscriptions. This will help avoid attempts to charge your card after it's been closed.
Call your credit card issuer and request that your credit card be canceled. Confirm with them that your balance is zero before closing a credit card.
Destroy the closed credit card by shredding it or cutting it up.

Why you should close a credit card

You're overspending: If having access to a credit card tempts you to spend more than you normally would -- particularly if it's landing you in debt -- you should consider closing a credit card. Keep in mind, though, that regular credit card usage is key to building and maintaining good credit. Consider leaving your credit card at home and using it to pay one or two small bills each month.

Your interest rate is increasing: If you're currently paying off a card balance, and you get a notice that your interest rate is increasing, the Credit Card Act of 2009 gives you the right to opt out of that increase -- as long as it's not due to a late payment. Doing so will likely result in the closure of your account, but you'll be able to continue paying off your balance at the current rate.

It charges an annual fee, and the benefits don't make up for it: If your credit card charges an annual fee, make sure you're earning enough rewards and benefits to make up for that fee. If not, closing a credit card you aren't using can be a good idea, but you can also try downgrading to a no-annual-fee version if possible.

It doesn't match your spending habits: The best credit cards come with generous rewards programs and benefits that line up with your spending habits and maximize your savings. If yours doesn't, you might want to consider getting one that does. However, as long as it doesn't charge an annual fee, leaving it open doesn't hurt -- and might even help -- your score.

Why you shouldn't cancel a credit card

You paid off your balance: Getting your balance down to $0 is cause for celebration, but it's not necessarily cause for closing a credit card. As long as you can be trusted not to go into debt again, it's usually better to leave the card open. This will help your credit score by keep your credit utilization and average age of accounts intact.

You don't use it often: Closing unused credit cards might seem like an obvious move, but as discussed above, leaving it open can be better for your credit. As long as your card doesn't charge an annual fee, it's often a good idea to leave it open.

You think you have too many credit cards: It's a myth that having a lot of credit cards is bad for your credit. In fact, as long as you use them responsibly, having multiple credit cards is better for your credit than only having one. Just make sure you can manage multiple payment due dates, and don't apply for too many cards in a short period of time,

You want a different credit card: If you come across a credit card offer that better suits your needs, and you qualify for it, go ahead and apply. Closing a credit card just because you got a new one isn't necessary.

Alternatives to canceling a credit card

If you overspend, consider...	Leaving the card at home so you have it for emergencies. You can consider (literally!) freezing the card in a block of ice so you can't use it impulsively, or asking a family member to hide it in a safe place.
If it has an annual fee, consider...	Downgrading to a no-annual-fee version. This will leave your credit history intact while you avoid paying fees for a card you don't use.
If it has a high interest rate, consider...	Asking your credit card issuer for a lower interest rate, or doing a balance transfer to a card with a lower interest rate.
If it doesn't match your spending habits, consider...	Leaving it open if it doesn't have an annual fee, and opening another credit card that fits your spending habits better.
If you rarely use it, consider...	Leaving it open if it doesn't have an annual fee, and putting one or two small, recurring bills on it so it doesn't get closed for inactivity.
If you want better rewards, consider...	Asking about a product change. You might be able to swap out the card for a different one that offers rewards more suited to your spending habits, and you won't lose your account history.

It's not necessarily bad to close a credit card account. While closing a credit card can hurt your credit score, sometimes it's the right choice. If you do close a credit card, you can help your credit score by opening a new card that better suits your needs or requesting a credit limit increase with one of your current cards. These will help keep your credit utilization low and protect your score. Knowing how to cancel a credit card properly will help you minimize negative impact on your credit.

About the Author

Elizabeth Aldrich

Elizabeth is a personal finance writer specializing in credit cards, debt repayment, and small business. Her work has appeared on The Motley Fool, MSN Money, Yahoo! Finance, and Business Insider. She’s an avid credit card points collector and perpetual traveler currently living in Costa Rica.