Is It Bad To Close A Credit Card?

In many cases, closing a credit card shortens the length of your credit history and raises your credit utilization ratio. This can lower your credit score because closing a credit card reduces your total available credit.

Consider the pros and cons of closing a credit card before making this personal finance decision.

Pros And Cons Of Closing A Credit Card

There are several pros and cons of closing a credit card. Here's what you should consider when deciding if you want to close a credit card once you’ve paid off the balance.

How Closing A Credit Card Impacts Your Credit Score

As mentioned above, closing a credit card has the potential to impact your score because of two important credit score factors: credit utilization and credit history length. They are two of several credit score factors described below:

• Payment history: Whether you make your monthly payments on time
• Credit utilization: The amount of outstanding credit balance used compared to your overall credit limit
• Credit history length: The amount of time each credit line is open
• Credit mix: The amount of revolving and installment debt you have (a mix is best)
• New credit: Some inquiries for new credit reduce your score slightly, as does opening new credit lines

Of these five factors, closed accounts can affect your credit utilization and credit history length, potentially lowering your FICO^® Score or VantageScore, depending on the scoring model.

Accordingly, you may want to check your credit report before closing a credit card to determine how it may affect your credit score.

Credit Utilization Ratio

Your credit utilization ratio compares your outstanding credit card balances to your total available credit limit.. For example, if your credit limit is $1,000 and your balance is $300, your utilization ratio is at 30%. Ideally, you should have a credit utilization rate of 30% or less for the best impact on your credit score.

Why would credit bureaus and lenders care about your balances? History shows that consumers with outstanding balances near their credit limit have difficulty keeping up with their bills. It may also signify that you are experiencing a difficult financial situation, and new lenders may not want to lend to you. Consumers with more available credit show they are in control of their financial situation and may have better credit scores.

Credit History Length

Your credit history length is the age of your accounts or the length of time they’ve been open. The length of your credit history makes up 15% of your FICO^® credit score, so it’s a significant factor when deciding when to close a credit card.

If you want a good credit score, you’ll need an established or long history of using credit responsibly, which may mean leaving unused credit cards open, even if you rarely use them anymore.

Keep Your Credit Card Or Close It: How To Decide

So is it always bad to close a credit card?

Not necessarily. There are some situations when closing a credit card account makes sense. Review the table below to determine where your situation falls.

The reasons above are just a few of the reasons to keep or close a credit card account. The largest factor is whether a card has a high credit limit or is your oldest account. For example, if you have credit card debt on other cards, closing a card with no balance can harm your credit score because it will shorten the length of credit history and increase your utilization rate.

The last reason you might consider closing a credit card if you're worried about identity theft. However, your credit card company may offer more short-term and more beneficial options before you do so, such as freezing your account, which doesn't damage your credit.

How To Cancel A Credit Card Without Hurting Your Credit Score

Knowing how to cancel a credit card while minimizing the impact to your credit score is important. Here are the necessary steps cardholders should use to maintain a good standing credit score after closing a credit card.

1. Pay off your outstanding balance or use a balance transfer credit card; you cannot close a card with a balance.
2. Use your rewards, including cash back, airline miles, or gift card rewards, because once you close the card, you lose any perks, too.
3. Contact the credit card company and tell them you want to close the account; they may offer you a ‘better deal,’ but if you are intent on closing, stick to your goals.
4. Send a certified letter to all credit card companies verifying your request to close the credit card account.
5. Destroy the credit card, ensuring the credit card number is no longer visible.

What To Do After Canceling Your Credit Card

After canceling your credit card, alert any other cardholders that you closed the card, and cancel any automatic payments. You should also check your credit reports 30 days after closing the account to ensure all three credit bureaus report it closed. If the closed credit card still appears on your credit report as open, dispute the credit line with the bureau reporting the incorrect information.

All three credit bureaus have an online process to file a dispute and have 30 days to investigate and respond to your request. Follow up to ensure the credit card account no longer appears on your credit report as open.

FAQs: Closing A Credit Card

Knowing when to close a credit card is essential to good personal finance habits.

Is It Better To Cancel Unused Credit Cards Or Keep Them?

Typically, it’s better to keep unused credit cards open unless you are in a situation where you’re paying an unnecessary annual fee, the interest rate is too high, or you’re ready to move onto a bigger and better card.

How Long Should I Wait To Close A Credit Card?

If you recently paid your credit card balance off, wait at least 30 days before closing the card. This allows enough time for proper reporting to the credit bureaus to ensure the balance is $0.

What Happens When I Close A Credit Card With Zero Balance?

The downside of closing a credit card with zero balance is you may increase your credit utilization rate if you have other cards with an outstanding balance. This could negatively affect your credit score.

Is It Bad To Have A Lot Of Credit Cards With Zero Balances?

Having multiple credit cards with a zero balance can increase your credit score because you'll have a great credit utilization rate. However, using your cards and showing a good payment history may help your score even more.

The Bottom Line: Closing A Credit Card Can Impact Your Credit Score

So, is it bad to close a credit card? The answer is yes and no. In most cases, yes, it's likely to hurt your credit score, but some situations make it the right choice. If closing a credit card will help you reach other financial goals, or improve your credit in the long run, consider it.

However, before closing a card, be sure it has no balance and that you've used all rewards. Ensure you aren't giving up any perks, such as a low APR, and that any of the alternatives, like locking the card up, aren't better.

Watching your credit score can help you make financial decisions and protect your assets. Get the Rocket Money℠ app so you can monitor your credit score and even get suggestions for how to improve it over time.