Is It Bad to Close a Credit Card? | Credit Cards

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When it comes to credit, there are few absolutes. If you miss a payment, that’s never good. In contrast, canceling a credit card is usually a bad idea, but there are a few exceptions.

Before closing a credit card, you need to look at two things: the overall economy and your current credit status. Unless you have a stable job situation and an emergency fund, I recommend hanging on to your credit cards in case you need them.

Another thing you must consider before closing a card is the health of your credit history. It’s important to know your credit status so you can determine the possible impact on your credit score.

How to Find Your Credit Score

You can find your credit score in a number of places these days. Check your monthly credit card statements because many issuers offer free scores. With many issuers, you can also just log in to your account and see an option to request a credit score. There are also free scores on many websites and apps. These scores won’t always be a FICO score, but you’ll still get a sense of your credit status.

If you have excellent credit, you’re in a good spot. It doesn’t mean it’s fine to close an account, but it puts you in a good starting position.

How Does Closing a Credit Card Impact Your Credit Score?

There are five factors that make up your FICO score: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%). Credit score algorithms use the information in your credit report to calculate your three-digit score.

When you cancel a credit card, several factors could be impacted. This, in turn, affects your credit score.

Canceling a Credit Card Can Increase Your Credit Utilization Ratio

One of the biggest factors – 30% – that’s weighed by the FICO score is your credit utilization ratio. This is the amount of credit you’ve used compared with the amount of credit you have available. A ratio of less than 30% is acceptable, but under 10% helps to boost your score.

So, let’s say you have four credit cards and they each have a $15,000 credit limit (and yes, I’m making the math easy on purpose). That’s $60,000 of available credit.

You’ve got a $2,000 balance on three of the cards and a $1,000 balance on the card you want to close. Your ratio is 11.7% (7,000/60,000), which is close to fantastic. You then pay off the $1,000 balance for the card you want to cancel. After closing the account, your ratio is now 13.3% (6,000/45,000).

In this scenario, you might lose a point or two. But if this card has an annual fee and you don’t use the card, you might decide it’s worth it. Your score will bounce back in time.

But what if you determine that your ratio would exceed 30% if you close the credit card in question? That’s a different story. Your score could drop quite a bit, depending on the details of your financial situation.

How Closing a Credit Card Impacts Your Credit History

You might not think this is important since your history only makes up 15% of your score. But every point matters, so if you want a high credit score, you must pay attention to all five factors.

Now, how long have you had credit? If you’ve got only a few years under your belt, then closing an account is not a stellar idea because you might only have a few credit lines in your report.

The good news is that your history won’t immediately be removed from your credit report. In fact, it could stay on your report for up to 10 years, so you won’t see a negative impact related to your average length of credit history right away. But you probably don’t want to close one of your few accounts at this point.

When you apply for credit, the lender looks at both your score and your credit report. You look less risky when you have several accounts showing that you’ve paid as agreed.

How Closing an Account Could Impact Your Credit Mix

Like credit history, this factor doesn’t get a lot of attention because it’s only 10% of your FICO score. This is another situation where being fairly new to credit could be a disadvantage.

Let’s say you have a student loan (installment account), a car loan (installment account) and one credit card (revolving account). If you close out your credit card, you’re left with two installment loans on your credit report. Without the credit card account, you don’t have a mix of credit. It won’t be much of a drop to your score, but if you’re on the bubble between fair and good credit, a few points really do matter.

Next, I’ll show you how to figure out if you’re on the bubble and what to do about it if you are.

Is Your Credit Status on the Bubble?

For some consumers, it’s possible that a few points off your score can drop you into a lower credit range. Let’s look at someone who has a 670 FICO score, which barely makes it into the good credit range. This person has these three credit cards:

  • Card A: $5,000 credit limit with a $3,000 balance.
  • Card B: $4,000 credit limit with a $2,000 balance.
  • Card C: $3,000 credit limit with a zero balance.

The credit utilization ratio for this consumer is 41.7% (5,000/12,000), which is already too high. But now the individual closes Card C. The new ratio? It’s 55.6% (5,000/9,000), which will likely drop this consumer’s credit score.

Here’s the issue: Closing Card C could push this score down into the fair credit range, which is in subprime territory. Once you’re in that range, if you need credit, your interest rates will be high. So be sure to have a strong enough credit score to withstand a decrease.

One more thing: If you’re rebuilding a poor credit history, I don’t recommend closing any credit cards. You don’t want to stop the momentum if you’re seeing your score improve. Just hang on if you can and keep working on your score. You can ditch the card later when you’re in great credit shape.

How to Cancel a Credit Card Account With Minimal Damage

OK, now you’re empowered with the credit facts. You don’t want to close an account if it makes your credit utilization ratio go up, especially to more than 30%. And you don’t want to mess with progress if you’re rebuilding your credit.

If you decide that canceling a credit card is the right thing to do and you need a replacement card, consider opening a new credit card account before you cancel the old one. This way, you replace some (or maybe all) of the available credit that’s factored into your credit utilization ratio.

But I don’t recommend opening a credit card account if you don’t need it. This strategy works best for someone who needs a certain type of card. For instance, you have an airline miles card, but you’ve realized you don’t travel enough to warrant the annual fee. In your current situation, you might believe you can get more value from a cash back card.

If you don’t need another credit card, then ask your credit card company if you can have a credit limit increase on one of your other credit cards. This will help minimize the increase in your credit utilization ratio.

But, of course, ask for the limit increase before you cancel one of your other credit card accounts.

Closing a Credit Card Is Not Your Only Option

If you decide that canceling a credit card is a risky move for you, you can still take steps to make the situation better:

  • Ask for an upgrade with your current issuer. This is a viable option if you’re looking for a rewards card and your issuer has one that fits the bill.
  • Downgrade your current card. If you’re trying to avoid an annual fee and your issuer has a card with fewer – or zero – rewards, this lets you keep a version of your card, keep the account open and also save money.
  • Keep the credit card for now. This is a good choice if you decide your credit can’t withstand the possible decrease in your score. Use the card once per month to keep it active.
  • Hide your credit card. Prevent overspending by placing your card in a drawer or in the freezer. I once heard from a reader who said she took that idea and kicked it up a notch. She put it in a jar of peanut butter and put that in the freezer. If you’re prone to impulse purchases, that’s a good way to give yourself a cooling-off period (pun intended) to allow the spending urge to pass.

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