Is It Always Bad to Cancel a Credit Card?
October 31, 2018 | By Beverly Harzog
Find out how to close a credit card account without trashing your score.
When it comes to credit, there are few absolutes. If you miss a payment, that's never good. If you max out all of your credit cards, then yes, you can count on something bad happening to your credit score.
But closing a credit card? Well, that is probably a bad idea.
There are a few situations where closing a credit card makes sense. But you have to look at your whole credit picture to predict whether it's a good thing or an extremely bad thing to do. Closing a credit card can mean a decreased credit score for one consumer, but it might be a nonevent for another person.
So, let's take a close look at the factors you should consider before closing a credit card.
You Need to Start With Good Credit
It's crucial to know your current credit status so you can make an informed decision. If you have excellent credit, you're in a good spot. You have to start with a strong FICO score, and there are many ways to get your free score.
Check your monthly credit card statements, because many issuers are now offering 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 really want a snapshot of your FICO score and your card issuer doesn't offer it, then you can buy a FICO score on myFICO.com. The site offers a one-bureau credit report and your FICO score. Be careful that you don't accidentally sign up for a monthly monitoring service, though.
Just 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. So, 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.
Do You Have High Credit Limits?
Now, how long have you had credit? If you've got one year under your belt, then closing an account is not a good idea. At this point, you might have some good credit lines on your report. But you probably don't have high credit limits.
But if you have 10 to 15 years of good credit history on your report, then you've probably got pretty high credit limits. This is important because it helps lower your credit utilization ratio, which is what we're going to go over next.
By the way, another factor in your credit score is the length of your credit history. It makes up 15 percent of your score.
When you close a credit card account, your history will eventually fall off your report. But that could take up to 10 years, so you won't see a negative impact related to your length of credit history right away.
Why Your Credit Utilization Matters
According to a 2016 survey by American Consumer Credit Counseling, more than half of consumers have maxed out a credit card. That is not good for your credit score.
One of the biggest factors 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 percent is acceptable, but closer to 10 percent 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 each on three cards and a $1,000 balance on the card you want to close. Your ratio is 11.7 percent (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 percent (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.
Be Careful If You're 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 percent (5,000/12,000), which is already too high. But now the individual closes Card C. The new ratio? It's 55.6 percent (5,000/9,000), which will likely drop a score.
Closing Card C could push this score down into the fair credit range. In a situation like this, I'd advise against canceling a credit card. Wait until you have a strong credit score before you consider taking action.
How to Cancel a Credit Card Account With Minimal Damage
OK, now you're empowered with the credit facts, right? You don't want to close an account if it makes your credit utilization ratio go up, especially over 30 percent. And you don't want to mess with progress if you're rebuilding your credit.
If you still have reason to cancel an account, 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 really want to add a cash back card to your wallet.
If you don't need another credit card, then ask your credit card company if you can have a credit limit increase on your card. This will help minimize the increase in your ratio.
But, of course, ask for the limit increase before you cancel your credit card.