Closing a credit card in the u.s.: Can it hurt your credit? Find out now!

Closing a credit card may seem like a straightforward decision, but in the U.S., it can have a significant impact on your credit score. Many people assume that getting rid of an unused card is a responsible financial move, but the reality is more complex.

Credit scores are calculated based on multiple factors, and canceling a credit card can affect several of them, including credit utilization, account history, and total credit available.

Understanding how credit card closures influence your financial profile is essential before making a final decision. In this article, we’ll explore whether closing a credit card can hurt your credit score, when it might be beneficial or harmful, and the steps you should take to minimize any potential negative effects.

How closing a credit card affects your credit score

Credit scores in the U.S. are calculated using five main factors: payment history, amounts owed, length of credit history, new credit, and credit mix. Canceling a credit card can impact a few of these categories, potentially leading to a drop in your score.

Impact on credit utilization

One of the biggest ways closing a credit card can affect your score is by increasing your credit utilization ratio. This ratio represents the percentage of your available credit that you are currently using. Credit utilization is a major component of your FICO score, accounting for about 30% of the total calculation.

For example, if you have two credit cards with a combined credit limit of $10,000 and a balance of $2,000, your utilization rate is 20%. If you close a card with a $5,000 limit, your total credit available drops to $5,000, instantly raising your utilization to 40%—a change that could negatively impact your credit score.

Effect on length of credit history

The length of your credit history makes up 15% of your FICO score. Creditors prefer to see a long and stable credit history, which helps demonstrate responsible financial behavior. If you close one of your oldest accounts, you may reduce the average age of your credit accounts, which can lead to a lower score.

However, closed accounts in good standing remain on your credit report for up to 10 years, so the impact may not be immediate. But if you are considering closing your oldest account, it’s important to be aware of the long-term consequences.

Potential changes to your credit mix

Credit mix accounts for about 10% of your credit score and refers to the variety of credit accounts you have, such as credit cards, mortgages, and installment loans. While closing a single credit card won’t drastically impact this factor, if it results in you having fewer types of credit, it could slightly lower your score.

When closing a credit card makes sense

While closing a credit card can negatively impact your score, there are times when it may be the right decision. Some situations where closing a card makes sense include:

Avoiding high annual fees or interest rates

If a credit card has high annual fees and you’re not using its benefits, canceling it may be a wise choice. Similarly, if you have a card with a high interest rate and you’re carrying a balance, it may be better to pay it off and close it to avoid additional costs.

Reducing the risk of overspending

For those who struggle with managing multiple credit cards or have a tendency to overspend, closing an unnecessary account can help maintain better financial discipline. If keeping the card open leads to accumulating debt, it may be safer to close it.

Simplifying financial management

Some people prefer to have fewer credit cards to manage their finances more easily. If keeping track of multiple accounts feels overwhelming, closing an extra card might help streamline your financial obligations.

Best practices for closing a credit card safely

If you’ve decided that closing a credit card is the right choice, following these best practices can help minimize any negative effects on your credit score.

pay off your balance first – Ensure that the card balance is fully paid before closing the account to avoid interest charges or missed payments.
redeem any remaining rewards – If your card offers rewards, points, or cashback, use them before canceling the card to avoid losing any benefits.
consider transferring your credit limit – Some issuers allow you to transfer your credit limit to another card from the same provider, which can help maintain your overall available credit.
keep your oldest accounts open – If possible, avoid closing your oldest credit card, as it contributes to the length of your credit history.
monitor your credit report – After closing the card, check your credit report to ensure the account is correctly marked as closed and there are no errors.
notify recurring payment services – If you have subscriptions or automatic payments linked to the card, update them with another payment method to avoid missed payments.

Alternative options to closing a credit card

Instead of canceling a credit card outright, consider these alternatives that may help you achieve your financial goals without negatively impacting your credit score.

Downgrade to a no-fee card

If your main reason for canceling is an annual fee, check if the issuer offers a no-fee version of the card. This way, you can keep the account open without incurring extra costs.

Lock the card instead of canceling

Some credit card issuers allow you to temporarily lock your card, preventing unauthorized transactions while keeping the account open. This can be a good option if you want to avoid using the card but still maintain your credit history.

Use the card occasionally for small purchases

To keep the card active and prevent it from being closed by the issuer, use it for a small recurring expense, such as a subscription service, and pay off the balance in full each month.

Request a lower credit limit

If you’re worried about overspending, consider requesting a lower credit limit instead of closing the card. This can reduce your available credit while keeping the account open.

Conclusion

Closing a credit card in the U.S. can have both short-term and long-term effects on your credit score. While it may seem like a simple financial decision, it’s important to consider how it impacts your credit utilization, length of credit history, and overall credit profile.

If you must close a credit card, taking the right precautions—such as paying off the balance, redeeming rewards, and keeping your oldest accounts open—can help minimize any negative consequences. However, in many cases, keeping the card open or exploring alternative options may be a better financial move.

Before making any decisions, assess your personal financial situation, weigh the pros and cons, and choose the best approach to maintain a healthy credit score.