How Closing a Credit Card Impacts Your Credit Score

Thinking about closing a credit card? Whether you’re trying to simplify your finances, avoid fees, or reduce spending temptation, you might be wondering, What happens when you close a credit card? 

It’s a great question, and one you should understand fully before making a decision. Let’s dive into how closing a credit card can affect your credit score and what you can do to minimize any negative impacts.

What Happens When You Close a Credit Card?

When you close a credit card, the issuer removes your credit limit from your available credit. While this may seem like a straightforward process, the ripple effects on your credit score can be significant. Several factors come into play, including your credit utilization ratio, the age of your credit accounts, and your overall credit mix.

1. Impact on Credit Utilization

One of the most immediate effects of closing a credit card is the impact on your credit utilization ratio. This ratio refers to the amount of credit you’re using compared to the total credit available to you. It’s one of the most critical factors in determining your credit score, accounting for about 30% of your FICO score.

For example, if you have a total credit limit of $10,000 and you’re using $3,000, your credit utilization is 30%. If you close a card with a $5,000 limit, your total credit limit drops to $5,000, but your $3,000 balance remains the same. This change increases your credit utilization to 60%, which could significantly hurt your credit score.

2. Effect on Length of Credit History

Another factor to consider is how closing a credit card affects the length of your credit history, which makes up 15% of your credit score. The length of your credit history includes the average age of all your credit accounts. When you close a credit card, that account will eventually stop contributing to the average age of your accounts once it falls off your credit report, typically after 10 years.If the card you’re closing is one of your oldest accounts, closing it could shorten the average age of your credit, potentially lowering your score.

Tip: Before closing a card, check the age of the account and compare it to your other credit lines. Keeping older accounts open is often beneficial for your credit score.

3. Changes to Your Credit Mix

Your credit mix refers to the variety of credit accounts you have, such as credit cards, auto loans, mortgages, and personal loans. Having a diverse mix of credit types can positively influence your credit score, accounting for about 10% of your overall score.

Closing a credit card reduces the number of revolving credit accounts in your credit mix, which could have a minor negative effect on your score. While this factor is less influential than credit utilization or account age, it’s still worth considering, especially if you don’t have many other forms of credit.

Does It Hurt Your Credit to Close a Credit Card?

One of the biggest concerns people have is whether closing a credit card will hurt their credit score. The answer is it depends. Let’s break it down:

1. Your Credit Utilization Ratio Could Go Up

Your credit utilization ratio is the amount of available credit you’re using, compared to your total available credit. For example, if you have $5,000 in total available credit and you’re using $1,000, your utilization ratio is 20%. Keeping this ratio low is crucial because it makes up about 30% of your overall credit score.

Now, imagine you close a card with a $2,000 credit limit. Suddenly, your total available credit drops to $3,000, but your balance stays the same. Now your utilization ratio jumps to 33%, which could lower your credit score. So, if you’re thinking about closing a credit card, be sure to look at how it will affect this ratio.

Pro Tip: Firstcard will not negatively affect your credit utilization ratio in the traditional way. Since Firstcard doesn’t report a specific credit limit, your utilization remains unaffected, allowing you to spend freely, and build credit safely without worrying about high utilization penalties. This makes Firstcard unique among secured credit cards and particularly beneficial for those focused on rebuilding or establishing credit.

2. Your Credit History Length Could Shrink

The age of your credit accounts is another factor in your credit score. This includes the age of your oldest account, the average age of all your accounts, and the age of your newest account. If you close a credit card that you’ve had for a long time, you’re essentially shortening your credit history, which could negatively impact your score.

However, the effect might not be immediate. In most cases, closed accounts with positive history remain on your credit report for up to 10 years. But in the long run, closing an old account could reduce your average account age.

3. It Can Affect Your Credit Mix

Lenders want to see that you can manage different types of credit, such as credit cards, loans, and mortgages. This diversity, or “credit mix,” makes up about 10% of your credit score. While closing one credit card might not drastically change your mix, it’s something to keep in mind, especially if it’s one of only a few revolving credit accounts you have.

What Happens If You Close a Credit Card With a Balance?

If you’re thinking about closing a credit card that still has a balance, you should know that closing the card doesn’t get rid of your debt. You’ll still need to pay off whatever you owe, and interest will continue to accrue on that balance until it’s fully paid. On top of that, closing the card means you’ll have less available credit, which could increase your credit utilization ratio.

It’s generally a good idea to pay off any balances before closing a card to avoid hurting your credit score. And remember, your credit utilization ratio matters even if the card is closed!

When Closing a Credit Card Might Make Sense

There are definitely situations where closing a credit card makes sense. Here are a few:

• High annual fees: If a card comes with high fees and you’re not using it enough to justify the cost, closing it could save you money.

• Fraud or security risks: If your card has been compromised or you’re worried about future fraud, closing it might be the best option.

• Spending temptations: If you’re trying to avoid overspending, closing a credit card can be a good strategy to help you stay on track financially.

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How to Minimize the Impact of Closing a Credit Card

So, you’ve decided that closing your credit card is the right move. Here are some tips to minimize any negative impact on your credit score:

1. Pay down your balances: Before you close a card, try to reduce balances on other credit cards to keep your utilization ratio low.
2. Open a new card with caution: If your credit utilization is your main concern, you might consider opening a new card before closing the old one. But be careful — opening a new card can temporarily lower your score because of the hard inquiry and the decrease in the average age of your accounts.
3. Keep your oldest accounts open: If you have multiple cards, consider keeping your oldest account open, even if you don’t use it frequently. This helps maintain the length of your credit history.

What Happens When I Close a Credit Card With No Annual Fee?

Even if a card has no annual fee, closing it can still affect your credit score. This is especially true if it’s one of your older accounts or represents a significant portion of your available credit. While it might not seem like a big deal, losing that available credit could raise your utilization ratio, which could ding your score.

If you’re using a card like Firstcard that has low annual fees, you might want to consider keeping it open. There’s no harm in letting it sit idle if there’s low cost. Plus you’ll continue to benefit from things like cashback, high APY, and credit monitoring tools.

Alternatives to Closing a Credit Card

If you’re hesitant about closing a credit card because of the potential impact on your score, consider these alternatives:

1. Downgrade the card: Some issuers allow you to downgrade to a no-fee version of the card. This way, you can keep the account open without paying extra.
2. Reduce the credit limit: If you’re worried about overspending, consider asking the issuer to lower your credit limit instead of closing the account.
3. Use it for small, regular purchases: Keep the card active by using it for small purchases you can easily pay off each month. This way, you maintain a low utilization ratio and continue building credit.

Firstcard’s Unique Solutions

Firstcard® Secured Credit Builder Card was designed to help users build credit quickly and safely without high fees. Firstcard is an excellent option if you’re concerned about maintaining a good credit score after closing a card. With low fees, high cashback rewards, up to 4.00% APY, and tools for responsible credit management, Firstcard can help you achieve your financial goals without many of the complications and stressors associated with traditional credit cards.

The Bottom Line

Closing a credit card can have a large impact on your credit score depending on how it affects your credit utilization, credit history length, and credit mix. While it’s not always a bad decision, it’s something that should be done thoughtfully and with a clear understanding of how it fits into your overall financial plan. 

Ultimately, the decision to close a credit card is a personal one, but now you know exactly what to expect! Whether you’re trying to cut down on fees, reduce spending, or simplify your finances, remember to weigh the pros and cons carefully and consider the long-term effects on your credit score before making a decision.

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