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So you want to cancel your credit card account. Still, you might want to think twice before calling your credit card issuer to delete the account. Closing a credit card can hurt 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 credit score setback. 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 credit utilization?
Credit usage describes the relationship between your credit card balances and your credit card limits. When you have high credit card usage ratios on your credit report, this behavior could hurt 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 only report activity to the credit bureaus once a month. So your credit report balance and limit will be a snapshot of your account details as of your statement closing date.
It’s best to maintain a credit utilization rate of 0% to 10% if you want to maximize your credit scores. But unless you plan to apply for funding in the near future, a utilization rate of less than 30% may be sufficient.
Either way, you’ll want to pay off your full statement balance by the due date each month to avoid costly credit card interest and to protect your credit score from late payments. If you’re trying to keep the credit usage on your credit report as low as possible, the best time to pay your credit card is before the statement closing date.
Card credit usage vs. overall credit usage
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 referred to as card credit usage and overall credit usage. In both scenarios, lower credit card usage rates are better for your credit score.
Here’s a look at the credit usage formula in action on an individual credit card account.
Next, here’s an example of what overall or overall 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 skyrocket your overall credit utilization rate. But here is an illustration of why this can happen. In the chart below, you’ll see an example of what would happen to your credit utilization rate if you closed credit card #3 (above) with a $0 balance.
Closing your refunded credit card in the above scenario would increase your overall credit utilization from 50% to 83%. Although your debt remains the same in both scenarios, at $12,500, your utilization rate increases because the closed card credit limit no longer acts as a cushion to help you.
It’s worth pointing out that rising credit utilization rates could be a problem regardless of who closes a credit card account. Card issuers will sometimes close credit cards due to inactivity or other reasons. Whether your credit card company closes your account or you do so voluntarily, increased credit usage can lead to a lower credit score.
Another potential problem
In addition to the potential credit usage problem, closing a credit card could be particularly problematic for some consumers. If you don’t have many other open accounts, closing a credit card could put you in the “thin” credit category. When you have a thin credit record, you may not be able to get the highest credit scores that are achievable for those with a higher number of trade lines on their credit reports.
How the length of credit history is affected
If you research the subject of credit card closures, you might come across a common warning. Many believe that closing a credit card will “age” your credit report. However, in many cases, this warning is unfounded.
Credit score models like FICO and VantageScore take into account your credit history age. And factors like the average age of accounts on your credit report can impact your credit score.
- FICO® Scores: 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), the FICO scoring models still count it in your average credit age calculations. Closed and positive accounts stay on your credit file 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 bit 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 out of your credit report. When this happens, your average account age may also decrease as far as FICO is concerned. At this point, you may see a score drop caused by your credit card being closed, especially if the card you closed was your oldest account.
How to Close Credit Cards Safely
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 if your credit card’s annual fee is high and its benefits don’t outweigh the cost. Generally, you should also close joint accounts upon divorce or separation.
On the other hand, closing a credit card will not remove it from your credit report. So if you’re hoping to erase negative activity with an account closure, this strategy won’t be effective.
If you’ve done your research and feel 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 score perspective.
- The first step: Pay off the total balance on your credit card and confirm that 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 before the statement closing date for those accounts. (If you can’t afford to pay off your credit card debt, you might consider using a consolidation loan to lower your utilization 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 ensure that the card issuer updates the account to show that it is closed with no outstanding balance.
The steps above should help protect your credit score from harm when you close a credit card account. But there are also other factors you should consider 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 consider downgrading your credit card account, say, to an account with no annual fee, rather than closing it outright.
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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 inquiries. And when you close your account, it’s best to make sure all your credit cards are paid off first. Following these smart credit steps could help you avoid or minimize any potential damage to your credit score from closing a credit card.