Yes, cancelling a credit card can hurt your credit score, potentially making it harder to qualify for new loans or lines of credit until your scores recover.
How Cancelling a Credit Card Impacts Your Credit
When you close a credit card account, it can impact several key factors that influence your credit scores. These factors are crucial in determining your overall creditworthiness:
1. Credit Utilization Ratio (CUR)
Your credit utilization ratio is the amount of credit you're using compared to your total available credit. It's a significant factor, accounting for about 30% of your FICO score.
- Impact: Closing a credit card reduces your total available credit limit. If you carry balances on your remaining cards, your credit utilization ratio will likely increase. A higher CUR signals greater risk to lenders and can lower your credit score.
2. Length of Credit History
The age of your credit accounts, particularly your oldest account and the average age of all your accounts, contributes to about 15% of your credit score.
- Impact: If you close an older, well-established credit card, it can shorten the average age of your credit history. This is especially true if that card was one of your first credit accounts. A shorter average credit history can negatively affect your score.
3. Credit Mix and New Credit
While less impactful, your credit mix (having different types of credit, like revolving credit and installment loans) and how recently you've opened new accounts also play a role.
- Impact: Closing an account can subtly alter your credit mix. It might also influence future applications if lenders see a history of closed accounts.
The table below summarizes the primary ways cancelling a credit card can affect your credit profile:
| Credit Factor | Impact of Cancelling a Card | Why it Matters |
|---|---|---|
| Credit Utilization | Decreases total available credit, increasing CUR | High CUR indicates higher risk; lowers your score. |
| Length of History | Reduces average age of accounts | Shorter history means less established credit behavior. |
| Credit Mix | Can slightly alter the diversity of your credit | A good mix demonstrates responsible credit management. |
Potential Consequences
A lower credit score can have several ripple effects:
- Difficulty Qualifying: It can make it harder to qualify for new loans, mortgages, auto loans, or other lines of credit in the future.
- Higher Interest Rates: If you do qualify, you might be offered less favorable terms, including higher interest rates, due to perceived higher risk.
When Cancelling Might Be Considered (and Alternatives)
While cancelling a credit card isn't your only option, there are specific situations where it might be a good idea for some cardholders. However, it's crucial to weigh the potential credit impact against the benefits.
Reasons You Might Consider Cancelling:
- High Annual Fees: If the card has an annual fee that outweighs the benefits you receive, especially if you no longer use the card frequently.
- Temptation to Overspend: If having the card makes it difficult to manage your spending and leads to accumulating debt.
- Fraud or Security Concerns: If the card issuer has had major security breaches or if you suspect your account is compromised.
- Unused Card with No Benefits: A card that sits unused and offers no significant rewards or perks might seem like a candidate for closing.
Alternatives to Cancelling
Fortunately, there are several strategies you can employ to avoid closing a card while still addressing common concerns:
- Downgrade or Product Change: Contact your credit card issuer to see if you can convert your existing card to a different product, such as a no-annual-fee version or one with different rewards. This keeps the account open and preserves your credit history.
- Keep the Account Open but Don't Use It: If the card has no annual fee, you can simply keep it open and not use it. This maintains your available credit and the age of the account. Occasionally making a small purchase and paying it off immediately can keep the account active.
- Pay Off Balances on Other Cards: If your primary concern is a high credit utilization ratio, focus on paying down balances on your other credit cards before considering closing any accounts. This will reduce your overall utilization without impacting your total available credit.
Minimizing the Impact if You Must Cancel
If cancelling a card is unavoidable, you can take steps to mitigate the potential damage to your credit:
- Pay Down Balances: Before cancelling, pay off as much debt as possible on all your credit cards to lower your overall credit utilization ratio.
- Cancel Your Newest Card: If you have multiple cards and must close one, opt for your newest card, as closing an older account will have a greater negative impact on your average age of accounts.
- Monitor Your Credit: After closing an account, regularly check your credit report and score to track any changes and ensure accuracy.
