If you’re trying to budget and spend less, closing one of your credit cards might seem like a responsible decision. But closing a credit card can sometimes have a negative impact on your credit score, especially if it’s an older account or one with a high credit limit.
In some situations, closing a card might be worth the hit to your credit. If the card has a high annual fee you can no longer afford or makes it too easy for you to overspend in other ways, then it might have a positive impact on your overall financial health to close the account.
But if you no longer use an old credit card, you’re not benefiting from a card’s rewards program, or you’re just trying to free up space in your wallet, it may be wise to reassess your options. Here’s what to consider before closing an old credit card.
5 questions to ask before canceling a credit card
1. How old is the account?
The age of your credit history accounts for 15% of your FICO credit score — the scoring model that’s used is by over 90% of lending institutions. While the length of your credit history isn’t as important as your payment history in determining your overall score, a longer credit history does have a positive impact.
Closing an old card shortens the length of your credit history, which can effectively lower your score. While the importance of this factor may lessen as your credit history becomes more established, it’s generally not a wise choice to close your oldest account, especially if your other accounts are relatively new.
If the card you’re considering closing has no annual fee, your best bet is to discontinue using the card but keeping the account open.
2. What is the card’s credit limit?
Another factor that influences your credit score is your utilization ratio — that is, your total available credit compared to the balance you’re using. Your utilization ratio accounts for up to 30% of your FICO credit score, making it an even more important factor than the age of your credit history.
It’s generally good advice to keep your utilization ratio below 30%. But if you close a card with a high credit limit, your utilization may rise enough to lower your credit score.
Try dividing your total credit card balances by your total available credit, both with and without the card you’re considering closing. Multiple your answer by 100 to get a percentage. If closing one of your credit cards will push your utilization ratio above 30%, you may want to think twice.
3. Do you have a good payment history?
Making on-time payments is one of the most influential factors in establishing a good credit score. If you’ve never missed a payment on the credit card you’re considering closing, you’ll probably be better served by leaving that account open.
But if you do choose to close an account with a positive payment history, it may not affect your credit immediately.
An account with a positive payment record can stay on your credit report for up to 10 years after it’s closed, so you could benefit from it for some time to come. However, once the account is closed the clock will start ticking, and the positive payment history will eventually be removed from your credit report.
4. Will someone be checking your credit soon?
Even if you’ve decided it’s best to close a credit card account, timing is everything. If you plan to apply for a mortgage, auto loan, or other lending product soon, it may be best to wait until you’re approved before taking any action that could lower your credit score.
5. Are there alternative solutions?
Before closing a credit card, see if there are other options that could solve the issue.
For example, if your credit card is tempting you to overspend, you could cut it up, freeze it in a block of ice, or lock it away somewhere that’s hard to access. If you want to be really poetic about curtailing your spending, you can hold a funeral for your credit card and bury it in the backyard.
If you’re stuck paying an annual fee on a card you no longer use, try contacting the card issuer to see if you can downgrade your account to a no-fee card in the same product line. Just make sure to redeem any rewards points before you do this.
How to cancel a credit card
If you do choose to close a credit card, make sure to do so safely and responsibly. Here’s how.
1. Check the card’s balance
You’ll need a plan for paying off any remaining balance on the card.
It’s typically best to pay off the card entirely before closing it, since this will help keep your utilization ratio low. If that’s not possible, you may be able to transfer the balance to another card, preferably one with a 0% introductory APR.
It’s usually possible to cancel a card that has a balance and then continue to work on paying it down after the account is closed. However, this could come with additional fees or a higher interest rate, so this option could cost you more in the long run.
2. Redeem any rewards
If you don’t use them, you’ll lose them! Cash out in the form of a statement credit, or use your points to purchase travel, gift cards, or other rewards. Just be sure to take advantage of any points left in your account before you close it.
3. Update your autopayments
If your credit card is set up as the autopay method on any bills or services, update your payment info before you close the card. That will prevent you from missing any payments or racking up late fees.
4. Call the card issuer and submit a written request to close the account
You’ll need to contact the credit card issuer directly to cancel your account. It’s often best to also submit the request in writing so you have proof of the date you requested the cancellation.
Ask the issuer to report to the credit bureaus that the account was “closed by customer request.”
5. Check your credit report
Monitor your credit report to make sure the account shows as “closed” and that there are no negative notations associated with the closure.
If you closed it in good standing, the account will remain on your credit report as a closed account for up to 10 years. If you had a spotty payment history, that account should come off your credit report within 7 years.
6. Destroy the card
Once you’ve confirmed the account is closed, cut up your credit card before throwing it away.
Think carefully before closing a credit card, as there are almost always better alternatives. If a card has an annual fee you no longer want to pay, see if downgrading to a card without an annual fee is possible.
If closing the card is your only option, determine what the results will be beforehand and follow all the necessary steps to close your account safely. Your credit score will thank you.