One of the most common personal finance myths I encounter when talking to friends and family has to do with the credit score impact of closing a credit card. Often it’s assumed closing a card will have a net positive effect on a credit score.
On the surface, I can see why someone would think this. The rationale is having fewer credit cards is an indicator you aren’t drowning in debt and should naturally raise your score.
However, you may be surprised to learn canceling a credit card can actually hurt your credit score rather than giving it a boost. Keep reading to learn why and strategies you can take to protect your score during the card cancelation process.
TIP: Even if your score takes a hit after canceling a card, Experian Boost™ can help raise your FICO score with every utility and mobile phone bill you pay on time.
Why credit card cancelations can negatively impact credit scores
There are two primary ways canceling a credit card can hurt your credit score. The first is by raising your credit utilization rate and the second is by lowering the average age of your credit accounts. Let’s take a closer at how each of these scenarios can play out.
How canceling a credit card affects credit utilization
With both the FICO and VantageScore scoring models, credit utilization (i.e. how much of your available credit is being used) is one of the most important scoring factors.
But when you cancel a credit card, your credit utilization rate can automatically go up even without any increase in spending. For example, let’s say you have three credits cards with the following credit limits:
- Credit Card A: $5,000 credit limit
- Credit Card B: $3,000 credit limit
- Credit Card C: $2,000 credit limit
By adding the credit limits of all three cards together, you’ll have a total of $10,000 in available revolving credit. Now let’s imagine you never exceed $2,500 in combined credit card spending. That would give you a credit utilization ratio of 25% (2,500/10,000 = .25), which is good.
But now imagine you cancel Credit Card A, removing the $5,000 credit line from your credit report. Your credit utilization rate would jump to 50% (2,500/5,000 = .50) even if your monthly spending stayed the same.
And when you have that kind of a sudden and dramatic increase in credit utilization, you can expect your credit score to suffer.
How canceling a credit card affects credit history length
When it comes to credit scoring models, longer credit histories are key. As the average age of your credit accounts goes up, you can expect your credit score to rise in tandem (all other factors remaining equal).
But do canceled credit cards continue to be factored into your average credit length? It depends on the scoring model. FICO considers the age of closed credit cards, but VantageScore may not in some circumstances.
Even FICO can only continue to factor in your closed accounts for as long as they’re on your credit report. When those closed accounts eventually fall off your reports (usually within 7 to 10 years), your average length of credit history will go down.
If you’re looking to cancel a card you recently opened last year, it’s unlikely to have a severe impact on your average credit age. But canceling your oldest cards can trigger a bigger hit, which is why many credit experts advise against doing so unless absolutely necessary.
How to cancel a credit card without hurting your credit score
Despite everything explained above, there are ways to minimize the negative effects of closing a credit card account. Here are three strategies worth considering.
Open a new credit card before canceling your unwanted one
Over the past decade, I’ve opened and closed nearly 20 credit card accounts. Yet my credit score has never fallen below 780 during that span. How? One reason is I have faithfully followed the strategy of opening a new credit account before closing an old one.
This strategy works because it helps you avoid a big credit card utilization spike after you cancel a card. Here’s how it works: Imagine you have six open credit cards for a total credit limit of $15,000. You typically spend about $3,000 of your limit for a credit utilization rate of 20%.
One of your cards, with a $4,000 credit limit, has a high annual fee (waived the first year) you don’t want to pay. But before you call to cancel the card, you apply and get approved for a new card with:
- A great sign-up bonus
- No annual fee in year one
- A $5,000 credit limit
Once you’re approved for the new card, you cancel the one you wanted to get rid of. After it’s all said and done, you actually end up with a slightly higher overall credit limit of $16,000 and a lower credit utilization rate — while avoiding an annual fee and possibly earning a big rewards bonus.
This strategy doesn’t change the fact your average credit history length would go down. But age of credit is less important than your utilization rate. Plus, if the canceled credit card was opened fairly recently, the difference will be minimal anyway.
Pay off your remaining balance
If you decide canceling a credit card is the right decision for you, paying down your balance before you make the call is a must.
First, you don’t want to forget about the balance after the card is out of your life and accidentally miss a payment. Second, you don’t want to be making a payment on a card that doesn’t even count towards your overall credit limit.
Finally, paying down your balance will reduce your credit utilization rate. And, in some cases, it could even outweigh your reduced credit limit. For example, imagine you have three credit cards with the following credit limits and balances:
|Credit Card||Credit Card Limit||Balance|
Between all of your cards, you currently have $4,000 of credit card debt, for a rather high utilization rate of 50%. You decide to pay down and cancel Card A with a $3,000 credit limit and $2,000 balance.
In this example, you’d be left with $2,000 of debt and $5,000 in total available credit, for a slightly lower utilization rate of 40% (2,000/5,000 = .40).
Keep your overall credit card utilization rate below 30%
According to the Consumer Financial Protection Bureau (CFPB), credit scoring systems tend to look most favorably on credit utilization ratios that are at or below 30%. If you’re someone who’s very disciplined with your credit card spending, you may fall well below this mark.
If so, canceling a card or two is unlikely to make a significant impact on your score. For instance, you may only use $1,000 of your $10,000 of available credit. In that case, you could reduce your credit limit to $8,000 and your utilization rate would still only be 20% as long as you keep your spending at $1,000 (1,000/8,000 = .20).
Would your credit score take a hit if your credit utilization ratio doubled from 10% to 20%? Maybe. But the dip would likely be far less severe than if, for example, your utilization rate jumped from 20% to 40%.
Another way to keep your utilization ratio down after canceling a card is to reduce your credit card spending. In the example above, if you cut your monthly credit card spending from $1,000 to $800 per month, you’d get to keep the ultra-low 10% credit utilization rate (800/8,000 = .10) credit score formulas love.
Alternatives to canceling a credit card
While the strategies above can help to minimize the negative impacts of canceling a credit card in some cases, they won’t work for everyone. If you only have one or two credit cards, for instance, it will be much harder to avoid a credit utilization spike after canceling one.
However, it’s important to note you might be able to achieve similar goals without actually canceling a card. Below are three alternatives to canceling a card you may want to consider.
Downgrade to a no-fee version of the card
This is a great option if the main reason you’re looking to cancel the card is to avoid an annual fee. Simply call up your credit card issuer and say you’ll be closing the account unless they can offer you a no-fee version.
Often card companies are happy to accommodate you to keep your business. With this strategy, you get to keep the positive payment history and credit limit without the hefty fee!
Just know you’ll probably receive fewer rewards and perks than you earned when you were using the fee-charging version of the credit card.
Related: Best Rewards Credit Cards of 2020
Put the card away
If you have a no-fee card that you don’t use anymore, it won’t hurt you to keep the account active. Rather than keeping it in your wallet, you can just tuck it away safely inside a drawer in your home.
I, personally, have five credit cards I keep inside my “card” drawer. And I try to use them each about once per year (usually around my birthday) to keep them from potentially being shut down by the card issuer due to inactivity.
Perform plastic surgery
Are you primarily looking to cancel your credit card because you don’t want to remove the temptation to overspend using debt? If so, that could be a very wise decision.
But there are ways to make your credit card unusable without canceling the card and hurting your credit score. For example, you could submerge the card in water and put it in the freezer. Or you could literally perform “plastic surgery,” by taking out a pair of scissors and cutting up the card.
These ideas won’t work completely as you could still always use your credit card number to buy things online. However, if most of your struggles with impulsive credit card spending happen when you’re inside a store, simply making the physical card inaccessible could help to get things under control.
How to monitor your credit after canceling a credit card
Once you’ve canceled a credit card, you’ll want to keep an eye on how it affects your credit moving forward. Here are some of our favorite places to monitor your credit score:
One final suggestion would be Experian Boost. In addition to providing your Experian credit scores and reports, Experian Boost also gives you credit for paying your monthly bills like your cell phone, utilities, or Netflix.
Even if your score takes a hit after canceling a card, Experian Boost could help you quickly gain back some ground by using your non-credit positive payment history to improve your score. Learn more about Experian Boost.
Canceling a credit card could have a negative impact but if you do it the right way, you keep your credit score up while reducing your debt and temptation to spend.