How Canceling a Credit Card Can Affect Your Credit Score and What to Consider Beforehand

Updated on January 17, 2023

Learn about the potential impact of canceling a credit card on your credit score, including how credit limits and utilization can affect your score, the role of account age, and when it makes sense to cancel. Discover alternatives to canceling a credit card and what to consider before making a decision. Make sure you are making a strategic decision that will not have a long-term detrimental effect on your credit score.

Summary

Closing a credit card can negatively impact your credit score, especially if you have a little credit history or a small number of credit cards.
Credit limits and how you use them, as well as the age of your credit accounts, can also affect your credit score.
Personal finance experts recommend using less than 30% of your overall credit limit to have a better credit score.
Canceling a card with a high credit limit can have a significant impact on your score, as it will decrease your overall credit limit, which increases your credit utilization
Having older accounts is generally considered better when it comes to credit.
The impact of closing an account on your credit score can vary depending on the scoring formula used.
There are certain situations where canceling a credit card may be the best decision, such as high annual fees, poor customer service, graduation to a permanent card or life events like divorce or separation from a spouse.
Alternatives to canceling a credit card include calling the card issuer and asking for better terms, building your credit score and then switching to a better card, and putting the card in a drawer and not using it.

The Impact of Canceling a Credit Card on Your Credit Score

Closing a credit card can negatively impact your credit score, especially if you have a little credit history or a small number of credit cards. This can make it more difficult to secure an apartment, loan, or additional credit card, particularly if your credit score is close to a lender’s minimum requirement. It’s important to consider the potential loss of credit score points before closing a credit card and making a strategic decision. You can check your credit score for free on NerdWallet, which updates weekly.

MORE: What Affects Your Credit Score?

How Canceling a Card can Hurt your Score

How Credit Limits and Utilization Affect Your Score

It is important to consider the impact on your credit score before canceling a credit card. Your credit score is affected by several factors, one of which is your credit limit and how you use it. Canceling a card with a high credit limit can have a significant impact on your score.

The second most influential factor on your credit score is your credit utilization, which is the amount of credit you are using compared to your credit limit. Personal finance experts recommend using less than 30% of your overall credit limit, with the highest scorers generally using less than 10%.

For example, if you have three credit cards, two with $5,000 limits and one with a $10,000 limit, for a total of $20,000. If your total balance across all three cards is $2,000, your overall credit utilization is 10%. If you cancel the card with the $10,000 limit, it will cut your overall credit limit in half, and your $2,000 balance becomes 20% of your limits. This increase in credit utilization will negatively impact your credit score.

MORE: Building Your Credit: Myths and Reality

The Role of Account Age in Your Credit Score

When it comes to credit, having older accounts is generally considered better. The age of your credit accounts, including the age of your oldest account, can also affect your credit score, though not as significantly as credit utilization.

When it comes to closing accounts, it’s important to note that the impact on your credit score can vary depending on the scoring formula used. The FICO scoring formula, which is the most widely used, considers both open-and-closed accounts when calculating the average age of your credit accounts. On the other hand, VantageScore, a rival scoring formula, may not include closed accounts in its calculation. Thus, closing an account may decrease the average age of your credit accounts and potentially lower your VantageScores.

MORE: How Many Credit Cards Should You Have?

When Canceling a Credit Card Makes Sense

There are certain situations where canceling a credit card may be the best decision. Here are a few examples:

High annual fees or poor customer service: If a credit card has an annual fee that you don’t feel is worth it, or if the customer service is consistently poor, you may want to consider canceling the card.
Graduation to a permanent card: Some credit cards, such as secured cards, are intended to be temporary and are meant to be upgraded to a permanent card with better terms. If the issuer does not offer such an upgrade, canceling the card may be a wise decision.
Life events: Divorce or separation from a spouse can make canceling a credit card necessary. Disentangling finances may involve canceling joint credit cards or removing one’s self or the spouse as authorized users to protect against unauthorized spending.

It’s important to keep in mind that canceling a credit card can have an impact on your credit score. Before making the decision, it’s advisable to consider the potential effect on your credit, as well as take steps to minimize any negative impact.

Alternatives to Canceling a Credit Card.

Before canceling your credit card, consider these alternatives:

Call the card issuer and ask for better terms. If you’re canceling due to fees, inquire about fee-free cards you may qualify for. If the card is no longer a good fit, ask if there’s a different card that better suits your needs.
Build your credit score and then switch. If you don’t qualify for a new card right now, keep the current card active and paid off every month to boost your score. This may make you eligible for a card with better rewards and perks in the future.
Try different ways to avoid overspending. If you’re canceling to prevent impulse spending, remove the card from your wallet and keep it in a safe place for emergencies. Also, delete saved payment information from shopping sites to reduce the temptation to overspend.

Steps to Safely Cancel Your Credit Card

If you’ve decided to cancel your credit card, follow these steps to ensure your finances aren’t harmed:

Automatic payments: Review your past statements and identify which charges are the result of automated payments. Switch these charges to another credit card to avoid future declines and potential late fees.
Pay your balance: Most credit card issuers require you to pay your balance, including pending charges, before closing your account. If you have a high balance, make a plan to pay it off over time. Remember, if an issuer allows you to cancel your card before paying off your balance, you are still responsible for those charges.
Redeem your rewards: All unused points will be forfeited when you close your account, so be sure to redeem any rewards you’ve earned. Some cards offer a “pay yourself back” feature, which can be used to pay off your statement balance.

Conclusion

In conclusion, closing a credit card can have a negative impact on your credit score, and it is important to consider the potential loss of credit score points before making the decision to close a credit card. Factors such as credit limits, credit utilization, and the age of your credit accounts can also affect your credit score. Before canceling a credit card, it is important to consider the potential effect on your credit, as well as take steps to minimize any negative impact. Additionally, there are alternatives to canceling a credit card, such as calling the card issuer and asking for better terms, building your credit score and then switching to a better card, and putting the card in a drawer and not using it. Overall, it is essential to make a strategic decision when considering closing a credit card to ensure that it will not have a long-term detrimental effect on your credit score.

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Questions Answered in this Article

Does Closing a Credit Card Hurt Your Credit Score? Answer: Yes, closing a credit card can negatively impact your credit score, especially if you have a little credit history or a small number of credit cards.
How does canceling a card affect your credit score? Answer: Canceling a card with a high credit limit can have a significant impact on your score. The second most influential factor on your credit score is your credit utilization, which is the amount of credit you are using compared to your credit limit.
Why is it important to consider the age of your credit accounts? Answer: When it comes to credit, having older accounts is generally considered better. The age of your credit accounts, including the age of your oldest account, can also affect your credit score, though not as significantly as credit utilization.
What are some examples of situations where canceling a credit card may be the best decision? Answer: High annual fees or poor customer service, graduation to a permanent card, and life events such as divorce or separation from a spouse can make canceling a credit card necessary.
What are alternatives to canceling a credit card? Answer: Alternatives to canceling a credit card include calling the card issuer and asking for better terms, building your credit score and then switching to a better card, and putting the card in a drawer and not using it.