Here’s What Happens to Your Credit Score When You Close a Credit Card
Put down the scissors and back away slowly. Here's what really happens to your credit score when you close an account…
Not so fast…
According to a recent survey by Credit Card Insider, nearly one-third of respondents think closing a credit card can actually help your credit score. In fact, the opposite can be true, says Dana Marineau, VP and financial advocate at Credit Karma. “Closing a card comes with disadvantages and benefits, so the key is to be thoughtful about it and don’t just do it blindly,” she says. “Really think about, and know, why you’re closing a card and what you’re going to get out of it and how it will affect your credit before you do it.” Here’s how closing a credit card can affect your score, plus when it may be a good idea (and how to go about doing so). Find out 10 things you think hurt your credit score, but don’t.
It shortens your credit history
Every time you open your wallet, there it is: That one card you’ve had forever and never used. Best to close it then, right? Wrong, says Marineau. “The card you’ve had longest is the one that establishes your credit history,” she says. In fact, your credit history is what accounts for 15 percent of your scores in FICO scoring models, says Greg Mahnken, credit industry analyst at Credit Card Insider. This is the difference between your credit score and credit report.
It lowers your credit utilization
Credit utilization is one of the most important factors in your “amounts owed” category, which is worth 30 percent of your FICO credit score, says Mahnken. “Generally speaking, the lower your utilization percent, the better it is for your score,” he says. Closing an account will therefore automatically raise your credit utilization. Mahnken does the math for us: “Let’s say you have $1,000 credit limits each for two cards,” he says. “Your balance on one card is $500, and the other is $0. This means your credit utilization is 25 percent. Then let’s say you decide to close the card with a zero balance because you don’t use it. Now you’ve raised your credit utilization rate to 50 percent. This will negatively impact your credit score.” In general, you should aim to keep your utilization rate at 30 percent or below, adds Marineau.
It won’t instantly wipe your credit slate clean
Bad news for those thinking that closing an account is an instant “get out of credit jail” card. “When you close an account, it doesn’t instantly vanish from your credit account,” says Mahnken. “If you have an account in negative standing, it will take seven years for it to fall off your report—ten if you have an account in good standing.” In fact, keeping your cards open is one of the 11 simple ways to raise your score.
There are times, though, when closing an account may be a good idea. Our experts count the ways:
When it might be a good idea: You’re paying high-interest rates
If you’re not using a card, and are paying high-interest rates or an annual fee, you might want to consider closing that account, says Mahnken. But pick up the phone first, he suggests. “Many times, you’ll have success by calling your card issuer and asking them to waive your annual fee for a year, or downgrading to another card that includes no annual fee,” he says. “More often than not, they will agree because they want to keep you as a customer, and this way you can keep your credit history with that account and it won’t have an impact on your score.”
When it might be a good idea: You have too many cards
You know how it goes: You get enticed by a store discount on the spot when you sign up for a card (hello, Banana Republic!), and before too long you have a wallet filled with cards—along with those tempting sales offers. “There’s no right or wrong number of cards, it’s a personal preference, and it’s all up to whether you can manage them,” says Marineau. “But if you’re finding it hard to keep track—or hard to avoid temptation—you may want to consider closing it.” Do you have too many credit cards? Find out exactly how much is too much.
When it might be a good idea: You want to close a joint account
While joint accounts can be useful—for establishing credit for a first-time user, for example—there are times when it’s best to close a joint account. “If you’re going through a divorce, and you have a joint account, just remember that both parties are responsible for joint debt regardless of who is swiping the card,” says Mahnken.
Before you snip the plastic, remember that there is a method to the madness. Our experts offer top do’s and don’ts for closing a credit card:
Before you do: Redeem your rewards
Got points? Then make sure you get them, says Mahnken. “Remember not to leave rewards on the table—redeem them before you close your account,” he says. Speaking of…here’s how to use your reward points on your next vacation.
Before you do: Pay off or transfer your balance
If possible, try and have that balance paid off in full before you close an account, suggests Mahnken. If not, take advantage of balance-transfer options—where, with good credit, you can often get up to 18 months with zero interest. “Even if you don’t qualify for zero-interest balance transfers, you can often be eligible for a lower rate transfer,” he adds.
Don’t close all your cards at once
It’s best to thoughtfully close one account than to get rid of all your plastic at the same time, says Marineau. “It looks suspicious if you close too many at the same time. Stick with one at a time,” she says.
Always monitor your credit score
Regularly check your score after closing an account to check for errors, and to gauge how it’s affected your score. But don’t sweat it if you don’t like the number you see, Mahnken reminds us. “Credit scores are important, but they’re not the only factor in a lending decision,” he says. “So if you’re worried about closing a card and the impact it might have on your score, just remember that if you really need to close a card, it’s not the end of the world. In general, though, if it doesn’t cost you anything, and it’s in good standing, it’s a better idea to keep it open.” Find out how one man got the highest credit score by age 45.