Does Closing a Credit Card Impact My Credit Score?
Approximately 84% of adults have at least one credit card, according to the Federal Reserve. Although people take out credit cards for various reasons, many use them to pay for everyday purchases, earn rewards, or build their credit scores. There may come a time, however, when you consider closing one or more of your accounts. Before you do, consider this question – “Does closing a credit card impact my credit score?” Here’s what you need to know.
Potential Negative Impacts on Your Score
Closing or canceling a credit card may impact your credit score in a few different ways. Although it may seem logical to close an inactive account or one with a high-interest rate, here are two things you should consider before making that decision.
It Increases Your Credit Utilization Ratio
When you close a credit card, it has a direct impact on your credit utilization ratio. That’s the amount of credit you’ve used on a card and across all credit accounts. The lower the ratio, the higher your credit score tends to be. If you close an account with a large open balance, it can potentially drop your credit score.
Here’s an example of how it works:
If you have four credit cards that have a combined available credit of $20,000 and a total of $2,000 in charges, your credit utilization ratio is 10%. Now, let’s say you close a high-interest-rate card that has a $10,000 credit line. Your credit ratio will jump to 20%.
The reduction in available credit and increase in your ratio could cause your credit score to fall.
And Lowers Your Average Account Age
Along with potentially raising your credit utilization score, closing a credit card may impact the average age of your credit accounts. This too can negatively impact your credit score because longer payment histories tend to bolster your overall creditworthiness.
Although your FICO score won’t take a hit, other credit scoring companies use different calculations. VantageScore®, for example, generally doesn’t include closed accounts when determining average account age.
Even if your scores do take a dip, they’ll typically recover in a few months if you continue to make on-time payments and keep your debt-to-credit ratio low.
How to Safely Close a Credit Card
There may be situations where closing a credit card is necessary or it makes financial sense. Just be sure to follow these steps to limit the impact on your credit score.
- Redeem Any Rewards. Don’t let your earned rewards go to waste. Once the account is closed, you most likely won’t have access to them.
- Pay Off Your Balance. If at all possible, pay your balance in full before canceling your card. Interest will continue to accumulate after it’s closed and any remaining balance will increase your credit utilization score.
- Contact Your Credit Card Company. Contact customer service and let them know you’d like to close your credit card. If there’s a balance remaining, set up a plan for paying it off quickly. You should also request confirmation of closure in writing and ensure that it’s marked “closed at borrower’s request” on the account. If you don’t receive confirmation within 4 to 6 weeks, follow up with your card issuer. Don’t forget to notify any authorized users and destroy all cards associated with the account.
- Update Payment Profiles. If you used the card for any automatic payments, you’ll need to update those accounts to avoid any missed payments.
- Review Your Credit Score. It’s a good idea to pull a credit report from the three major companies (TransUnion, Equifax, and Experian) within a few weeks after closing your credit card. You’ll want to be sure it’s marked closed by you and paid in full, if applicable. You’ll also be able to see if there was any significant impact on your overall credit score.
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