Key Highlights
Thinking about closing one of your credit cards? It’s a big decision that can affect your financial health. Before you make a move, here are the key things you need to know:
- Closing a credit card can temporarily lower your credit score by impacting your credit utilization ratio and the age of your accounts.
- You may want to cancel a card to avoid a high annual fee, curb overspending, or switch to a card with better rewards.
- Before closing, always pay off your balance and redeem any accumulated rewards.
- Contact your credit card issuer’s customer service to request the closure and ask for written confirmation.
- Consider alternatives like downgrading to a no-annual-fee card to preserve your credit history.
Understanding How Canceling a Credit Card Affects Your Credit
Closing a credit card isn’t as simple as cutting it up; the action is reported to credit bureaus and can have a real impact on your credit score. When you close an account, it can alter two key components of your credit health: your credit utilization ratio and the length of your credit history.
A closed account can cause a temporary dip in your score. However, understanding how these factors work can help you minimize the negative effects. Let’s look at how closing one of your credit cards can specifically influence your credit score, utilization, and history.
The Impact on Your Credit Score
Yes, closing a credit card can hurt your credit score, but the effect is often temporary. When you close an account, your score might take a small hit initially. This is because the closure affects factors like your credit utilization rate and the average age of your accounts, both of which are used in credit scoring calculations.
The good news is that an account closed in good standing—meaning you paid your bills on time—will remain on your credit report for up to 10 years. This positive payment history continues to work in your favor long after the card is gone. The credit bureaus will see this history, which helps demonstrate your reliability as a borrower.
Ultimately, your score should rebound if you continue to manage your other credit accounts responsibly. By making timely payments on your remaining lines of credit, you can quickly recover from the initial dip and maintain a healthy credit score.
Changes to Credit Utilization Ratio
One of the most significant impacts of closing a credit card is on your credit utilization. This ratio measures how much of your available credit you’re using. When you close a card, you lose its credit limit, which reduces your total available credit. If your balances on other cards stay the same, your overall credit utilization rate will increase, which can lower your score.
For example, imagine you have two credit cards:
- Card A: $2,000 credit limit with a $0 balance.
- Card B: $3,000 credit limit with a $1,000 balance. Your total credit limit is $5,000, and your utilization is 20% ($1,000 ÷ $5,000). If you close Card A, your new total limit is $3,000, and your utilization jumps to 33% ($1,000 ÷ $3,000).
Financial experts generally recommend keeping your utilization rate below 30%. A sudden increase can signal to lenders that you’re more reliant on debt, which can be seen as risky. Paying down balances on your other credit cards before closing an account can help offset this change.
Effect on Credit History Length and Credit Mix
The length of your credit history makes up about 15% of your FICO® Score. Closing an account, especially your oldest one, can lower the average age of your accounts and potentially hurt your score in the long run. An account closed in good standing stays on your report for 10 years, but once it falls off, your average account age could drop.
Your credit mix, or the variety of credit accounts you have, also plays a role. Lenders like to see that you can responsibly manage different types of credit, like credit cards (revolving credit) and personal loans (installment loans). Closing your only credit card could reduce this diversity and have a minor negative effect.
Deciding whether to keep or close a card involves weighing these factors. Here’s a quick guide:
| When to Keep a Card Open | When to Close a Card |
|---|---|
| It’s your oldest credit account. | The annual fees are too high. |
| You have few other open credit accounts. | The interest rates are very steep. |
| Closing it would significantly raise your credit utilization. | You are tempted to overspend with it. |
| The account is in good standing and helps your payment history. | You want a new card with better rewards. |
Reasons You Might Consider Canceling a Credit Card
There are many valid reasons why you might decide to close a credit card account. Perhaps you’re paying a high annual fee for a card you rarely use, or you want to switch to a card with better rewards or features. For some, closing a card is a strategic move to simplify finances or remove the temptation to accumulate credit card debt.
Whatever your motivation, it’s important to think through your decision. Unwanted card features, a difficult card issuer, or poor customer service can all be compelling reasons to say goodbye to a particular card. We’ll explore some of the most common reasons in more detail.
High Annual Fees or Unwanted Card Features
One of the most common reasons to close a credit card is because of a high annual fee. Many rewards credit cards come with these fees, and if you’re not using the card enough to make the benefits outweigh the cost, it might be time to cancel. Why pay for perks you don’t use?
Before you cancel, do a quick cost-benefit analysis. Calculate the value of the rewards you earn in a year and compare it to the annual fee and any additional fees. If the card is costing you more than you’re getting back, closing the account could be a smart financial move.
Situations where canceling due to fees makes sense include:
- You no longer travel enough to justify a travel rewards card’s fee.
- Your spending habits have changed, and you don’t earn enough cash back to offset the cost.
- You’ve found a different card from another credit card company that offers better value for a lower or no annual fee.
Reducing the Risk of Overspending or Fraud
Credit cards offer incredible convenience, but for some, they can also be a gateway to overspending. If you find that having multiple credit cards makes it difficult to stick to your budget, closing an account can be a practical way to regain control of your finances. Removing the temptation can help you focus on paying down debt and building healthier spending habits.
Another reason to close a card you don’t use is to reduce your exposure to fraud. Every open account is a potential target for thieves. While the card company offers protection, managing fewer cards makes it easier to monitor your statements for suspicious activity and quickly report any issues.
Closing a card can help you:
- Stick to a budget by limiting your available credit.
- Simplify your financial life with fewer bills to track.
- Minimize the risk of your information being compromised in a data breach.
When to Keep vs. Cancel an Unused Credit Card
Deciding what to do with an unused credit card can be a tough call. On one hand, keeping it open can be beneficial for your credit history, especially if it’s an old account in good standing. It contributes positively to the average age of your accounts and adds to your total available credit, which helps keep your utilization low.
On the other hand, if the card has a high annual fee or tempts you to spend, closing it might be the better choice. It really boils down to your personal financial situation and goals. Let’s weigh the advantages of keeping a card open against the situations where canceling makes more sense.
Advantages of Keeping a Card Open
Even if you don’t use a credit card often, keeping it open can offer several benefits for your credit health. One of the biggest advantages is its contribution to your overall credit limit. A higher limit helps keep your credit utilization rate low, which is a major factor in your credit score.
Keeping an older account open also helps lengthen your credit history. A longer history shows lenders that you have more experience managing credit, which can make you appear more reliable. As long as the account is in good standing, it adds positive information to your credit report.
Here are a few key reasons to keep that card in your wallet:
- It boosts your total available credit, which helps your credit utilization rate.
- It increases the average age of your accounts, which positively impacts the length of your credit history.
- It adds to your positive payment history, assuming you’ve always paid on time.
Situations Where Canceling Makes Sense
While keeping a card open can be helpful, there are certainly times when closing it is the right move. If a card carries a high annual fee and you’re not getting enough value from its benefits, you’re essentially paying for nothing. In this case, canceling the card can save you money each year.
Another compelling reason is if you’re struggling with credit card debt. Removing the temptation of an open line of credit can be a crucial step in taking control of your spending and focusing on a repayment plan. If you’re unsure, seeking professional advice from a financial advisor can help you make an informed decision.
Consider canceling your card in these situations:
- The card has a high annual fee that you can no longer justify.
- You are trying to manage and pay down significant credit card debt.
- You’ve had a poor experience with the credit card issuer and wish to take your business elsewhere.
What You Need Before Canceling Your Credit Card
Before you pick up the phone to cancel your credit card account, a little preparation can save you from future headaches. You’ll want to take a close look at your account to ensure a smooth closing process. This includes checking for any outstanding balances, reviewing your rewards, and identifying any recurring payments linked to the card.
Taking these steps ensures you won’t lose valuable rewards or accidentally miss a bill payment after the account is closed. Let’s break down what you need to check and why it’s so important for a clean break from your card issuer.
Checking Outstanding Balances and Recurring Payments
It is always best to pay off your balance in full before you close your credit card. While a card issuer will let you close an account with outstanding balances, you are still responsible for paying off the debt. You’ll have to continue making monthly payments until the balance is zero, and interest will continue to accrue.
Failing to pay off the remaining debt can lead to the issuer charging off the account, which is a major negative mark on your credit report. This can also lead to your account being sent to collections, causing even more damage to your credit and resulting in additional fees.
Equally important is to check for any recurring payments linked to the card. Think about subscriptions like streaming services, gym memberships, or utility bills. You must switch these to a new payment method before closing the card to avoid service disruptions and late payment fees. Reviewing your last few statements can help you identify all automatic charges.
Reviewing Rewards, Points, and Penalties
If you have a rewards credit card, don’t let your hard-earned points or cash back go to waste. Most card issuers have a policy where you forfeit any unused rewards as soon as you close your account. Before you make the call to cancel, log in to your account and check your rewards balance.
Make a plan to use or transfer your points. Some programs allow you to transfer points to partner airlines or hotels, which might be a good option. Otherwise, you can redeem them for cash back, gift cards, or merchandise. The key is to cash them in before the closed credit card status becomes official.
Before you close the account, make sure you:
- Redeem all outstanding rewards, points, or cash back to avoid losing them.
- Check your card’s terms to see if the card company allows you to transfer points to another program.
Alternatives to Canceling Your Credit Card
Are you hesitant to close your credit card account because of the potential credit score impact? The good news is you might not have to. There are alternatives that allow you to keep your credit history intact while addressing the reasons you wanted to cancel in the first place, like a high annual fee.
Before making a final decision, consider calling your credit card issuer’s customer service line to explore your options. You might be able to request a product change to a no-annual-fee card or even receive a retention offer. Let’s look at how these alternatives work.
Downgrading to a No-Annual-Fee Card
If a high annual fee is your main reason for wanting to cancel, downgrading your card might be the perfect solution. This process, often called a product change, involves switching to a different card from the same issuer, typically one with no annual fee. This is often a much better option than outright cancellation.
The biggest benefit of a product change is that you get to keep your account open. Your account number may change, but the original open date remains, preserving the length of your credit history. This means you avoid the negative impacts of closing an account, like a shorter credit history and a higher credit utilization ratio.
To request a downgrade, simply call the customer service number on the back of your card and ask if you’re eligible for a product change to a no-annual-fee card. Not all credit cards are eligible, but it’s always worth asking the card issuer.
Requesting a Product Change or Retention Offer
When you call your card issuer to discuss canceling, you might be pleasantly surprised by their response. Many credit card companies would rather keep you as a customer and may present you with a retention offer to convince you to stay. This is especially true if you have a good history with them.
A retention offer can come in various forms. The card issuer might offer to waive your annual fee for a year, provide a statement credit, or give you a bonus stash of rewards points. These offers can make keeping the card worthwhile, at least for another year. A product change is another great option, allowing you to switch to a more suitable card without closing your account.
When you call customer service, you can:
- Explain that you are considering closing your account due to the annual fee.
- Ask if there are any available retention offers.
- Inquire about a product change to a card that better fits your needs.
Frequently Asked Questions (FAQ)
What happens to my credit score if I cancel a credit card? Closing a card can impact your credit utilization ratio and overall credit limit, which might lower your FICO score. However, if the card has a high annual fee and isn’t benefiting you, it may be a good idea to cancel. Should I contact my card issuer before canceling? Yes, reaching out to their customer service line can help you understand any potential fees and ensure you’re making an informed decision.
Do I need to pay off my balance before canceling my credit card?
It’s highly recommended to pay off any outstanding balances before closing your credit card account. While you can close it with a balance, you’re still required to make payments until it’s paid off, and interest will continue to accumulate. Clearing the debt first ensures a clean closure of the account.
Are there any fees or penalties for canceling a credit card?
Generally, there are no penalties or additional fees for canceling a credit card. The credit card company can’t charge you for closing your account. However, you might forfeit rewards. Always check your card’s terms of use or contact the card issuer to confirm their specific policies before proceeding.
What happens to my credit card rewards if I close the account?
In most cases, you will lose any unused rewards when you have a closed credit card. It’s crucial to redeem all your points, miles, or cash back before you contact the card company to cancel. Some programs may allow transfers, so check with customer service for your options.
Frequently Asked Questions
Will closing a credit card hurt my credit score?
Yes, closing a credit card can temporarily hurt your credit score. A closed credit card reduces your available credit, which can increase your credit utilization ratio. It can also lower the average age of your accounts. The impact is usually small and your score can recover with responsible credit management.
Is it better to cancel a credit card or just stop using it?
If the card has no annual fee, it’s often better to keep the unused credit card open. An open account in good standing helps your credit history and utilization. However, be aware that some issuers may close an inactive account, so consider making a small purchase periodically to keep it active.