Does Closing A Credit Card Affect Your Credit Score? – Councilor Forbes



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So you want to cancel your credit card account. A recent survey found that 61% of Americans have made this decision at least once in their lifetime. Still, you might want to think twice before calling your credit card issuer to delete the account. Closing a credit card can damage your credit score. But there are some strategies you can use to potentially avoid credit damage if you plan ahead.

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The main problem with closing credit cards: the use of credit

In many cases, canceling a credit card can turn into a decline in your credit rating. Closing the account itself is not a problem. What you need to worry about is that closing a credit card account could increase your credit utilization rate. (Spoiler alert: a higher credit utilization rate can cause problems for your credit score.)

What is the use of credit?

Credit usage describes the relationship between your credit card balances and your credit card limits. When you have high credit card usage rates on your credit report, this behavior could adversely affect your credit score.

You can calculate your credit utilization rate using the following formula:

  • Credit card balance ÷ Credit limit × 100 = Credit utilization ratio

Credit scoring models calculate usage by looking at the credit card balance and limit numbers on your credit report, not from a real-time review of your account. Card issuers report activity to the credit bureaus once a month. Thus, your credit report balance and limit will be a snapshot of your account details as of your statement closing date.

It is best to maintain a 0% to 10% credit utilization rate if you want to maximize your credit scores. But unless you plan to apply for financing in the near future, a utilization rate of less than 30% may be sufficient.

Either way, you’ll want to pay your statement balance on or before the due date each month to avoid high interest on credit cards and to protect your credit score from late payments. If you are trying to keep the credit usage on your credit report as low as possible, the best time to pay off your credit card is before the statement closing date.

Card credit usage versus overall credit usage

The credit scoring models take into account the usage rates of individual credit card accounts and all of your credit cards combined. These two numbers are called credit card usage and overall credit usage. In both scenarios, lower credit card usage rates are better for your credit score.

Here is a look at the formula for using credit in action on an individual credit card account.

Next, here’s an example of what aggregate or aggregate credit usage might look like.

How closing a credit card can affect credit utilization rates

We’ve already touched on the concept that closing a credit card can lead to an overall increase in your credit utilization rate. But here is an illustration of why this can happen. In the table below, you’ll see an example of what would happen to your credit usage rate if you closed Credit Card # 3 (above) with its $ 0 balance.

Closing your refunded credit card in the above scenario would drop your overall credit usage from 50% to 83%. Although your debt remains the same in both scenarios ($ 12,500), your usage rate increases because the closed card credit limit no longer acts as a cushion to help you.

It should be noted that rising credit utilization rates could be a problem no matter who closes a credit card account. Sometimes card issuers will close credit cards for inactivity or other reasons. Whether your credit card company closes your account or you do so on purpose, increased use of credit can lead to a decrease in your credit score.

Another potential problem

In addition to the potential problem with using credit, closing a credit card could be particularly problematic for some consumers. If you don’t have a lot of other accounts open, closing a credit card may drop you into the “light” credit category. When you have a thin credit report, you may not be able to achieve the highest credit scores that are achievable for those who have a higher number of business lines on their credit reports.

How is the length of credit history affected

If you research the subject of credit card closings, you might come across a common warning. Many believe that closing a credit card will reduce the “age” of your credit report. However, in many cases this warning is unfounded.

Credit scoring models like FICO and VantageScore take into account the age of your credit history. And factors like the average age of the accounts on your credit report can affect your credit score.

  • FICO® Scores: The length of credit history is worth 15% of your FICO® score.
  • VantageScore: 20% of your score is based on your credit depth. The average age of your account is a factor in this category.

However, when you close an account (credit card or otherwise), FICO scoring models still count it in your average credit age calculations. Closed and positive accounts stay on your credit report for up to 10 years and up to seven years if they are negative. As long as an account appears on your credit report, its age is factored into your FICO score.

VantageScore credit scores are a little different. Some closed accounts may not count towards your average credit age. Therefore, a credit card closure could harm you if a future lender uses a VantageScore scoring model to calculate your credit score.

Eventually, a closed credit card will come off your credit report. When this happens, the average age of your account may decrease with respect to FICO as well. At this point, you may notice a drop in score caused by your credit card closing, especially if the card you closed was your oldest account.

How to safely close credit cards

There are legitimate reasons to close a credit card account. For example, you might want to cancel your credit card if you don’t trust yourself to use your credit card responsibly.
Another reason you might want to close a card is that your annual credit card fees are high, and the benefits don’t outweigh the cost. Typically, you should also close joint accounts during a divorce or separation.

On the other hand, closing a credit card won’t remove it from your credit report. So if you hope to clear negative activity with an account closure, this strategy will not be effective.

If you’ve done your research and believe that canceling your credit card is in your best interest, there are steps you can take to protect yourself. The steps below detail the safest way to close a credit card from a credit scoring perspective.

  • The first step: Pay your full credit card balance and confirm the balance is $ 0 with the issuer.
  • Second step : Cancel any recurring payments you have set up on the card.
  • Third step: Pay off all your other credit cards by the statement closing date on those accounts. (If you can’t afford to pay off your credit card debt, you might consider using a consolidation loan to lower your usage rates and potentially help you get out of debt faster.)
  • Fourth step: Call the card issuer to close your account. Request written confirmation that your account balance is $ 0.
  • Fifth step: Monitor your three credit reports to make sure the card issuer updates the account to show it is closed with no outstanding balance.

The above steps should help you protect your credit score from damage when you close a credit card account. But there are other factors you should take into account before canceling a credit card. For example, you’ll want to redeem or transfer any credit card rewards you’ve earned so you don’t lose them. And in some cases, you might want to think about downgrading your credit card account, for example, to an account with no annual fee, rather than shutting it down altogether.

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Final result

In general, you shouldn’t close a credit card unless you have a good reason. A credit card cancellation will not improve your credit score, nor will it remove a negative account from your credit report.

If you find yourself in a position where you think a credit card closure is necessary, be strategic about when and how you cancel your account. For example, you might want to delay the cancellation if you have anticipated upcoming credit requests. And when you close your account, it’s best to make sure all of your credit cards are paid off first. Following these smart credit steps could help you avoid or minimize the potential damage to your credit score that results from closing a credit card.

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