Chris Bridges, Founder and CEO, VITAL Card Inc.
A credit card, when used responsibly and with proper management, can be a valuable tool to help build your credit history. What happens when a cardholder has to close their card? Many people think that canceling a credit card will immediately impact their credit. This is not too surprising given there are a lot of myths out there about credit scores.
Let’s demystify common questions like, “Does canceling a credit card hurt your credit score?” and “Is it better to cancel unused credit cards or keep them?” It’s important to be aware of the potential consequences of canceling a credit card, especially if you’re planning to cancel a card with a long history or high limit.
Why Would a Cardholder Want To Cancel Their Credit Card?
There are a few reasons why someone might want to cancel their credit card, despite the potential impact on their credit score. Maybe they’re trying to get out of credit card debt and they think not having the card will help them resist the urge to spend.
Perhaps they’re no longer using the card and want to stop paying the annual fee, or they’re concerned about fraud and identity theft and don’t want to risk having their information stolen. Whatever the reason, if you’re thinking about canceling your credit card, consider how it could affect your credit score.
Canceling a credit card can stay on your credit report for up to 10 years, which means it could have an impact on your credit score for a long time. If you have a good credit score, canceling a credit card may not have a major impact.
However, if you have a limited credit history or a poor credit score, canceling a credit card could cause your score to drop significantly. That’s because part of your credit score is based on your credit utilization ratio, also referred to as the debt-to-credit ratio. This ratio is the amount of debt you have divided by the total amount of credit available to you.
In general, a higher credit utilization ratio can lower your credit score. Take a case in which you have $5,000 in debt and your lines of credit add up to $20,000 across all accounts. Canceling a credit card with a $10,000 limit would increase your credit utilization rate from 25% to 50%. In other words, you have the same amount of debt, which remains at $5,000, but less total available credit at only $10,000 due to the closed credit card.
How Does Canceling or Closing a Credit Card Affect Your Credit Score?
Credit card issuers may use several different credit scoring models to evaluate an individual’s creditworthiness. The most common type of credit score is the FICO score, which ranges from 300 to 850. Other types of credit scores include the VantageScore, which also ranges from 300 to 850, and the TransUnion New Account Score, which ranges from 501 to 990.
As to whether canceling a credit card will help or hurt your credit score, it depends on how long you’ve had the card, your payment history, and your credit utilization.
When you close a credit card, the issuer will report the account as “closed” to the credit bureaus. This can cause your credit utilization ratio to increase, which can hurt your score. In addition, the length of your credit history usually makes up 15% of your FICO score.
If you cancel a credit card that you’ve had for a long time, it could hurt your score, especially if it’s your oldest account. This is because it’s effectively reducing the average age of your credit history. That particular credit card account will then be removed from your credit report after 10 years, assuming there’s good standing on the account.
On the other hand, if you’re closing a relatively new credit card that you haven’t used much, it probably won’t have much of an impact on your score. Though canceling a long-standing card could lower your credit score, the decrease is often only temporary, lasting several months before your score rebounds.
Is It Better To Cancel Unused Credit Cards or Keep Them?
When you cancel a credit card, the account closure is reported to the credit bureaus and remains on your credit report for up to 10 years. This can impact your credit score in a few ways. First, if you have a good history with the card, canceling it can shorten your average credit history, which can lead to a lower credit score.
In addition, canceling a card can increase your credit utilization ratio (the amount of debt you have compared to your available credit). This can also lead to a credit score decrease. To avoid these negative impacts on your credit score, consider keeping the credit account open and active even if you’re not using it.
You can do this by making small charges on the card every few months and paying them off in full. This can help keep your credit utilization low and maintain a longer average credit history.
What Are Alternatives to Canceling Your Credit Card?
If you’re unsatisfied with your current credit card situation due to overspending, debt, or another reason, consider alternatives to canceling your card. You could try to negotiate with your credit card company for a lower interest rate or complete a credit card balance transfer to a new card with a 0% intro annual percentage rate (APR) period and cash-back rewards. Here are other alternatives to take into account.
Downgrade Your Card to a Different Type
If you have a rewards card with a high annual fee, you could downgrade to a basic card. This way, you can still keep the account open and active without having to worry about accumulating more debt.
Turn Off Automatic Payments
If you’re worried about overspending, you can always turn off automatic payments for your credit card. This way, you’ll only use your credit card when you really need it, and you can better monitor your spending.
Limit Your Credit Line
Another option is to contact your credit card company and ask them to lower your credit limit. This can help you stay within your budget and keep your debt under control.
What Should You Consider Before Closing a Credit Card?
When you cancel a credit card, the account is closed and no longer factored into your credit score. Depending on your situation, closing a credit card could help or hurt your credit. Here are some questions to ask yourself before making a final decision about canceling your card:
1. Are you carrying a balance on the card? It’s generally not a good idea to cancel the card until you’ve paid off the balance in full. Otherwise, you could be charged interest on the remaining balance.
2. Do you have other credit cards with a similar interest rate? If so, it might make more sense to keep the card with the lower interest rate and cancel the other one.
3. What is your credit score? If your score is already on the lower end, canceling a credit card could further damage your score. However, if your score is high, canceling a card may not have as big of an impact. Plus, the score decrease is typically only for a few months.
4. How long have you had the credit card? The longer you’ve had the card, the more it can help your credit score. If you cancel or close a long-standing credit card, it could have a negative impact on your score.
5. Are you paying an annual fee for the credit card? If so, closing the card to avoid paying that fee for years to come could be a good move.
These are only a few factors to account for when deciding whether or not to cancel or close a credit card. Weigh the pros and cons carefully before potentially impacting your credit score. And remember that you can always consult with a financial advisor if you’re unsure of what to do.
Bottom Line on How Canceling a Credit Card May Impact Credit
It’s important to be aware of the potential consequences of canceling a credit card, especially if you’re planning to cancel a card with a long history or high limit. While it’s true that closing a credit card can temporarily lower your credit score, the impact is usually short-lived.
Ultimately, whether or not canceling a credit card is the right decision for you depends on your individual circumstances and personal financial goals. If you’re trying to improve your credit score and history, it’s usually best to keep the account open and active by using it responsibly.
Conversely, if you’re struggling with debt, high-interest rates, or excessive fees, then canceling the card may be the best option. A temporary dip in your credit score shouldn’t keep you from doing what makes the most sense for your financial situation.
When applying for a credit card, consider how you plan to use it and for how long you may keep the account open. The best credit cards that can stand the test of time often come with low or no annual fees, feature compatibility with digital wallets, and provide smart financial tracking tools to help you manage your spending, such as the VITAL Card.
VITAL Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.