In some situations, credit card closure could negatively affect your credit score. If you’re considering closing one or more credit cards, keep reading to learn more about how this could affect your credit and how to proceed with credit card closure while minimizing any negative effects.
How Does Closing a Credit Card Affect Your Creditworthiness?
Your creditworthiness is determined by a mix of factors, including your payment history, current debt, length of credit history (the age of your credit accounts) and credit utilization, among other factors. Of these, credit utilization and length of credit history are both directly impacted by closing a credit card and the other factors could also be indirectly affected.
Length of Credit History
A longer credit history generally makes a positive impact on your creditworthiness. Canceling a credit card that you have held for some time may lower the average age of your accounts, which typically is a factor in your credit history. If the account was closed in good standing, then your credit score may dip temporarily but will likely bounce back if you continue to make any payments due on other accounts on time. The older your credit account, the more significant the impact may be.
Credit Utilization
Closing a credit card reduces your total available credit, which automatically increases your credit utilization ratio. An increase in this ratio can negatively impact your creditworthiness.
For instance, you may have two credit cards, each with a credit limit of $5000, so the total credit available to you is $10000. You may have an outstanding balance of $3000 on the older card and no balance on the newer card, which means you are using only 30% of the credit available to you. However, if you close the newer card, your available credit reduces to $5000, and with the same outstanding balance, you’re now using 60% of your total credit.
When Should You Cancel a Credit Card?
Despite the possible downsides of credit card closure, there are some scenarios when it makes sense to cancel your credit card. Here are some situations in which closing your credit card account may be the best course of action.
High Annual Fees
If your card has a high annual fee and you’re not using it enough to make the most of your benefits, then it may be worth closing.
When is it Better to Keep Your Credit Card?
In some situations, it may be best to avoid closing a credit card account. If these reasons have you thinking of credit card closure, then it may be better to reconsider.
You're Trying to Improve Your Credit
Closing a card does not automatically delete your credit history. Closed accounts with missed payments and other credit mistakes will still show on your report for about 7 years.
It's Your Oldest Account
The age of your oldest credit account contributes to increasing the average age of your credit. You may consider closing an old credit card simply because you no longer use it, or it has less favorable terms. However, a longer credit history can result in a better score because the length of your credit history is based not only on the average age of all your accounts, but also on the age of your oldest account. By closing your oldest credit account, it can potentially reduce your overall credit score.
You Have a Limited Credit History
If you only have a few credit accounts—meaning your credit file is thin— then closing even one can reduce your total credit available. This can increase your credit utilization ratio and reduce your overall credit mix, both of which can impact your score negatively.
Alternatives to Cancelling a Credit Card
Before you decide to close your credit card, it may be beneficial to consider your options. There are some alternatives you can take.
Try Different Ways to Avoid Overspending
If overspending is your primary issue, then there are ways to avoid using your credit card too much without canceling it. Try to form a budget that enables you to meet your financial needs while allowing you to manage the use of your credit card responsibly. Some companies will also allow you to “pause” your credit card without closing the account.
Transfer Your Balance to a New Card
A Balance Transfer moves your credit card debt from one account to another. Credit card users may opt for a Balance Transfer to take advantage of lower interest rates. For example, you could apply for a card with a 0% APR offer on Balance Transfers for a certain period of time, which enables you to pay off the debt you transfer without interest charges during that period. There may, however, be a Balance Transfer fee so check the terms of the offer carefully.
How Can You Close a Credit Card Responsibly?
If you close a credit card, it’s important to do so responsibly so you can minimize any potential credit damage. Follow this checklist of tasks to avoid issues with your credit card closure.
Pay Off the Existing Balance
To close your credit card responsibly, pay off your existing debt before closing the card. That way, you won’t have to worry about the existing balance accruing more interest.
Cancel Recurring Payments
If you have set up automatic payments for monthly bills or other expenses, be sure to cancel these recurring payments or transfer them to a different card before moving forward. Update your payment information as soon as possible to avoid any late fees.
Contact Your Credit Card Issuer
Contact your card issuer’s customer support and let them know you want to close the account. If you’re reaching out via chat or a phone call, request a written acknowledgment and ask for them to note that the account closure was requested by you rather than the lender.
Check Your Credit Reports
You will want to check your credit reports around 30 days after you have requested a credit card closure. Check to confirm that the report states that the closure was at the cardholder’s behest. If you find any incorrect information in your report, contact the credit bureaus to have the discrepancies resolved.
Discard Your Credit Card
Once the credit card issuer confirms that the account has been closed, properly destroy the card by either using a shredder or by cutting the card into pieces so that any information on the card is obscured or indecipherable. Dispose of the pieces separately so that the card information can’t be pieced together.
Frequently Asked Questions:
Can you close a credit card with a balance?
Yes, you can close a credit card with a balance, but you will still be responsible for the balance. The debt may continue to accrue interest, and if not paid, could eventually go into collections and possibly become a charge-off. At that point, you may be able to negotiate the debt.
How do you keep the credit utilization ratio down?
To keep overall credit utilization low, try to pay off the balances of your credit cards or keep the outstanding balances as low as possible.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
