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Coming to a crossroads on whether closing a credit card will hurt your credit score

When you’re trying to simplify your finances and get your spending under control, closing a credit card may seem like a smart move. However, before you take out the scissors to cut up your plastic, make sure you understand how closing a credit card account may impact your score. It may be in your best interest to keep your account open.

Whether cancelling your account is right depends on your spending habits and how well you are able to stay on top of your payments. If keeping the account open is going to tempt you to make purchases you won’t be able to pay off and/or to make late payments, it may be better to close it. Late payments in your credit report will nearly always look worse to a potential lender than a closed account.

Things to consider before closing an account

When you are thinking about closing a credit card account, there are a number of key factors you should keep in mind to make a more-informed decision:

How long has your account been open?

A well-aged account is one of the best things for your FICO score, and this is because credit reporting agencies factor-in the age of all of your credit accounts. Agencies look at the oldest and newest and even calculate the average age of all your accounts. Ideally, you want your history to contain accounts that were opened a while ago, as opposed to recently opened ones. Thus, when you close an old account, even if you are opening up a new one, and despite always making all of your payments on time, you’re effectively lowering the average account age in your credit history; and very likely, this may cause your credit score to decrease.

Are you thinking about closing that dinosaur credit card you opened fifteen years ago? Think again. Keeping it open may help you keep a higher credit score without any effort on your part, but closing it may decrease it. The degree of the negative impact will depend on the age of the account. As you may guess, closing a newer account may have a milder impact than closing older cards.

Will your credit utilization ratio be significantly affected by closing an account?

Credit utilization is another factor that potential creditors look at to determine your creditworthiness. This is the measure of how much a person owes on their credit cards compared to the total amount of credit available to them. If you cancel a credit card, chances are your credit score will be affected negatively because you’ll be lowering the amount of available credit, and therefore, raising your credit utilization ratio; even if the total outstanding balance of what you owe stays the same.

Here’s a credit-savvy tip: Once you understand credit utilization, you can work harder to keep your account balances low, or to earn credit line increases, to help offset any potential decrease in your credit score should you decide to close a card.

How diverse are the accounts in your credit report?

Having a diverse mix of credit types, such as a mortgage, auto loan, personal loan, and a credit card should give your credit score a nice boost. If you only have one credit card, you may want to keep it open to continue having a nice mix of accounts.

What happens when you cancel a credit card?

You may still feel that closing a credit card account is in your best interest; for example, if you are worried about the temptation of making purchases on your card that you can’t afford. So how do you cancel a credit card the right way?

First, make sure the balance has been paid in full. Then, follow the specific account-closing instructions from the issuer. If you are unsure about the process, give your card issuer a call. They can walk you through the process and triple-check that there is a zero balance on your card.

Also, don’t forget to check the status of any rewards you may have accumulated while using the card. It’s possible that once you cancel the account you will no longer have access to those. So again, contact your credit card issuer to make sure you take advantage of the rewards you earned.

Alternatives to Cancelling a Credit Card

Before cancelling, see if there are other alternatives that may allow you to keep your account open. This would allow you to have access to credit in the future without the need to open a new account, and you would also be ‘aging’ the account and boosting your score in the long term.

If your card issuer is threatening to close the account due to inactivity, you could simply make a few small purchases with the card, and this should keep it open.

You can always call your issuer to discuss solutions on how to keep your account open. Most companies don’t want card members to close their accounts. If you don’t want to lose the benefits attached to yours, and potentially take a hit on your credit score, consider talking with your credit card company’s customer service to see if they offer any solutions to keep you as a customer. It can’t hurt to ask, and closing the account is still an option. 

This material is for informational purposes only and is not intended to replace the advice of a qualified tax advisor, attorney or financial advisor. Readers should consult with their own tax advisor, attorney or financial advisor with regard to their personal situations.