Yes, canceling a credit card can potentially hurt your credit score, especially if it's a card you've maintained for many years. This action can lead to a temporary dip in your credit by affecting key components of your credit profile.
How Canceling a Credit Card Can Impact Your Credit Score
Closing a credit card account can influence your credit in several ways, primarily by altering factors that credit scoring models like FICO and VantageScore use to assess your creditworthiness.
1. Increased Credit Utilization
Your credit utilization ratio is a significant factor in your credit score, often accounting for about 30% of it. This ratio is calculated by dividing the total amount of credit you're currently using by your total available credit.
- The Impact: When you close a credit card, especially one with a high credit limit, your total available credit decreases. If your outstanding balances on other cards remain the same, your credit utilization ratio will automatically increase.
- Example: Suppose you have two credit cards, each with a $5,000 limit, totaling $10,000 in available credit. If you have a $2,000 balance across both cards, your utilization is 20% ($2,000 / $10,000). If you close one card, your total available credit drops to $5,000. Now, your $2,000 balance represents 40% of your available credit ($2,000 / $5,000), potentially hurting your score.
- Solution: Before considering closing a card, try to pay down balances on your other credit cards to keep your overall utilization low.
2. Lowered Average Age of Accounts
The length of your credit history is another important factor (around 15% of your score). This includes the age of your oldest account, the age of your newest account, and the average age of all your accounts.
- The Impact: Closing an old credit card, particularly your very first card, shortens the average age of your credit accounts. Credit scoring models tend to favor longer, established credit histories, as they indicate a proven track record of managing debt responsibly over time.
- Solution: If possible, try to keep your oldest credit accounts open, even if you rarely use them. Consider making a small, occasional purchase and paying it off immediately to keep the account active.
3. Altered Credit Mix
While less impactful than utilization or length of history, your credit mix (the variety of credit accounts you have, such as credit cards, mortgages, auto loans) also plays a role in your score (around 10%).
- The Impact: If the credit card you close is one of the few revolving credit accounts you have, or if it significantly alters your mix of credit types, it could have a minor negative effect. However, this is generally less significant than the impacts on utilization and average age.
When It Might Be Okay to Close a Card
While generally advisable to keep credit cards open, there are specific situations where closing an account might be a reasonable decision:
- High Annual Fees: If a card comes with a high annual fee and you're not utilizing its benefits enough to justify the cost, closing it can save you money.
- Alternative: Before closing, ask the issuer if they can downgrade you to a no-annual-fee version of the card or convert it to a different product. This keeps the account open and preserves your credit history.
- Temptation to Overspend: If having a particular credit card leads to uncontrolled spending and accumulating debt, closing it might be a necessary step for your financial well-being.
- Fraud or Security Concerns: If you believe an account has been compromised or the issuer has poor security, closing it might be prudent.
- Poor Customer Service: Persistent issues with an issuer's customer service can also be a reason to close an account.
Summary of Impacts
The decision to close a credit card should be carefully considered, especially given its potential effects on your credit score.
| Factor | Impact of Closing a Card | Explanation |
|---|---|---|
| Credit Utilization | Potentially Increases | Reduces your total available credit, making your outstanding balances appear as a higher percentage. |
| Average Age of Accounts | Potentially Decreases | Particularly if it's an older account, closing it can shorten the average length of your overall credit history. |
| Credit Mix | Potentially limits (minor impact) | Can reduce the variety of credit types you have, though this factor usually has a less significant effect. |
| Payment History | No direct immediate impact, but removes future positives | Your excellent payment history on the closed account remains on your report, but you lose opportunities for future positive reporting. |
Ultimately, maintaining a long history of responsible credit use, keeping utilization low, and making payments on time are the most crucial elements for a healthy credit score.
