What’s the Impact of Closing a Credit Card Account on My Credit Score?

 Closing a credit card account might seem like a simple solution when you no longer use a card or want to reduce the number of cards you manage. However, before you make the decision to close a credit card, it’s important to understand the potential impact on your credit score and long-term financial health. While closing an account may seem like the right move at times, it can have lasting consequences on your credit profile, especially if you’re aiming to build or maintain a good credit score.

In this article, we’ll explore the different ways in which closing a credit card can affect your credit score, the factors you should consider before making that decision, and how to minimize any negative impact. By the end of this post, you’ll have a clear understanding of how closing a credit card can influence your credit score and whether it’s the right choice for your financial situation.

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Understanding Credit Scores and What Affects Them

Before diving into the specifics of how closing a credit card can impact your credit score, it’s important to understand how credit scores are calculated and what factors contribute to the score. Your credit score is a number that represents your creditworthiness, or how likely you are to repay debts based on your credit history. The most common credit scoring model is the FICO score, which ranges from 300 to 850.

Your FICO score is calculated using the following factors:

1. Payment History (35%) – Whether you have made your payments on time.

2. Credit Utilization (30%) – The amount of credit you’re using relative to your credit limits.

3. Length of Credit History (15%) – The age of your oldest credit account and the average age of all accounts.

4. Credit Mix (10%) – The variety of credit accounts you have (credit cards, loans, mortgages, etc.).

5. New Credit (10%) – The number of recently opened accounts and hard inquiries on your credit report.

When you close a credit card account, it affects some of these factors, which in turn can impact your score. Let’s explore how the specific factors are influenced by closing a credit card.

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1. Credit Utilization Ratio

One of the biggest factors impacted by closing a credit card is your credit utilization ratio. This is the percentage of your available credit that you're using at any given time. It’s calculated by dividing your total credit card balances by your total credit limits across all your credit cards. A lower utilization ratio is better for your credit score, as it signals to lenders that you’re not overly reliant on credit.

For example, if you have two credit cards with limits of $5,000 each (total credit limit = $10,000) and carry a balance of $2,000 on one card, your credit utilization is 20%. Now, if you decide to close one of the cards with a $5,000 limit, your total available credit drops to $5,000, and your credit utilization jumps to 40%, even though your balance remains the same. This higher utilization rate can hurt your credit score, as it suggests you are relying more on credit.

Why It Matters:

Credit utilization is one of the most important factors in determining your credit score. Lenders typically look for a utilization ratio below 30%, with a ratio of 10% or lower being optimal for your score. A high credit utilization ratio can negatively affect your score, so it’s important to be mindful of how closing a card can affect this key metric.

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2. Length of Credit History

Another factor that can be impacted by closing a credit card is the length of your credit history. The longer you’ve had a credit card open, the better it is for your credit score. Closing an old credit card, especially one that you’ve had for many years, can reduce the average age of your accounts, which can lower your credit score.

Let’s consider an example: Imagine you have three credit cards, one of which you've had for 15 years, another for 5 years, and the third for 2 years. If you close the card you’ve had for 15 years, your average credit account age will decrease, which can harm your score. This is because the length of your credit history makes up 15% of your FICO score. The longer your credit history, the better, as it demonstrates your ability to manage credit over time.

Why It Matters:

The older your credit accounts, the more weight they carry in your credit score calculation. Closing an older account could make your credit history appear shorter and could lower your score in the short term. If your goal is to maintain or improve your credit score, it's generally better to leave old credit cards open, even if you no longer use them regularly.

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3. The Impact of Closing Cards on Credit Mix

Your credit mix refers to the variety of credit accounts you have, such as credit cards, mortgages, auto loans, and installment loans. A diverse credit mix can be beneficial to your credit score because it shows lenders that you can manage different types of credit responsibly. If you close a credit card and reduce the variety of your credit accounts, it could negatively affect your credit mix, especially if that card was your only credit card.

While the credit mix makes up only 10% of your FICO score, it’s still an important factor. For example, if you have a mix of credit cards, mortgages, and auto loans, you may have a higher score than someone with only a few credit cards. On the other hand, if you close a card and reduce your credit card accounts, it could lower your credit score, particularly if your other credit accounts are limited.

Why It Matters:

Lenders like to see a well-rounded credit history. Closing a credit card could impact the types of credit you have, potentially affecting your score in the long run. However, the impact on your score is usually smaller than that of credit utilization and account length.

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4. Hard Inquiries and Account Closure

When you close a credit card, there’s no new hard inquiry (credit check) performed. However, the credit inquiries from when you first opened the card could still be present on your credit report for several years. These inquiries will not directly affect your score once they are older, but they can still be factored into your credit score for up to two years.

If you had recently applied for a card with a significant credit line and then close it soon after, the effect of the inquiry will linger. However, generally, the closure of a credit card account does not generate new inquiries, so there won’t be any further negative impact in this regard.

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5. Potential Fees and Penalties for Closing a Credit Card

Some credit cards come with annual fees or other charges that may influence your decision to close the card. If you’re paying an annual fee for a card that you no longer use, closing it might seem like a logical decision to save money. However, keep in mind that some credit card issuers may charge fees for closing accounts early, especially if they are within the first year or if the card was opened to take advantage of a sign-up bonus.

Why It Matters:

When you close a credit card, make sure you’re not incurring any unnecessary fees or penalties. Some credit card companies may even reduce your credit limit or charge fees if you close an account without meeting certain conditions. Always check your cardholder agreement and review any fees associated with closing an account.

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Alternatives to Closing a Credit Card

If you’re concerned about the potential negative effects on your credit score from closing a credit card, there are alternatives to consider. Here are a few options to manage a credit card without closing it:

1. Simply Stop Using the Card: If you don’t want to keep a credit card in your wallet but don’t want to close it either, you can stop using the card while keeping it open. Just be sure to monitor any annual fees and other charges.

2. Ask for a Lower Credit Limit: If you’re concerned about the temptation to spend with a high credit limit, you can contact the issuer and ask for a lower credit limit rather than closing the account entirely. This can help reduce the impact on your credit utilization ratio.

3. Request an Account Upgrade: If your credit card no longer suits your needs but you want to keep the account open, consider upgrading to a different card with better rewards or benefits. This can help you retain the length of your credit history without losing the account.

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Conclusion

Closing a credit card account can have a significant impact on your credit score, primarily by affecting your credit utilization ratio, average account age, and credit mix. While it might be tempting to close a credit card to reduce the number of accounts you manage, it’s important to weigh the consequences carefully.

Before closing a credit card, consider the effects on your credit score and explore alternatives, such as lowering your credit limit or simply not using the card. If you do decide to close the account, be aware of the potential long-term effects and take steps to mitigate them, such as paying down balances on other cards to lower your credit utilization ratio.

Ultimately, closing a credit card is a decision that should be made with a clear understanding of your financial goals and the potential impact on your credit score. By taking a strategic approach, you can protect your credit profile while managing your credit cards in a way that works for you.