Does Closing A Credit Card Hurt Your Credit Score? Find Out

After all, owning fewer credit cards means you have less opportunity to accumulate more debt than you can repay.

But while it can be one of the more perplexing realities of how credit scores work, it’s true that closing a credit card account can lower your credit score. Here are the reasons why and the proactive steps you can take to protect your credit score when you’re canceling a credit card.

3 Reasons That Closing a Credit Card Can Hurt Your Credit Score

1. It Can Elevate Your Credit Utilization Ratio

One common reason that canceling a credit card could negatively impact your credit score is that it causes your credit utilization to go up. Your credit utilization ratio is the percentage of available revolving credit you’re using. With both the FICO and VantageScore credit scoring models, the amount of debt you owe is one of the most influential factors after payment history.

Let’s say you have four credit cards with a $2,500 credit limit for each. That gives you a combined credit limit of $10,000. If you spend $2,500 per month on your cards, your credit utilization rate is 25% ($2,500/$10,000=0.25). That’s good because the Consumer Financial Protection Bureau recommends keeping your credit utilization ratio below 30% for the best credit scoring results.

Now let’s say that you cancel one of your credit cards and continue spending $2,500 per month. Since your total credit limit is now $7,500, your credit utilization rate would rise to 33% ($2,500/$7,500=0.33) which is slightly above the 30% benchmark.

If you canceled two of your credit cards, your credit utilization rate would increase to 50% ($2,500/$5,000=0.50). So your credit utilization would double even if your spending stayed the same. That kind of credit utilization spike could certainly be detrimental to your credit score.

2. It Can Reduce Your Credit Mix

Credit mix is a credit score factor that considers the types of credit you have. The two main types of credit are revolving like credit cards, and installment loans like mortgages, home improvement loans, auto loans, and more.

Lenders like to see a history of managing a variety of credit types, which is why FICO and VantageScore both include credit mix as a scoring category. Closing a credit card can reduce your credit diversity, especially if it’s the only revolving credit account you currently have.

3. It Can Shorten Your Credit History Length

The longer you’ve been following good credit habits the more likely you are to continue following them in the future after you receive a new line of credit. For this reason, FICO and VantageScore both consider the age of your oldest and newest accounts as well as the average of all your accounts.

It’s important to note that a closed account will stay on your credit reports for several years. Accounts closed in good standing will remain visible for 10 years while accounts with negative information should fall off in seven years. FICO considers closed accounts when calculating your credit score and VantageScore may as well.

How To Minimize the Negative Credit Score Impacts of Canceling a Credit Card

Of the three main ways that a canceled credit card could hurt your credit score, an inflated credit utilization ratio can be the most impactful. It also tends to be one of the easiest to address. A straightforward way to neutralize the credit utilization impact of closing a credit card is to reduce your credit card spending at the same time.

Let’s say you spend $2,000 of a $10,000 total credit limit, so your credit utilization rate is 20% ($2,000/$10,000=0.20).
After canceling one of your cards, your credit limit drops to $5,000 and your utilization jumps to 40% ($2,000/$5,000=0.40).
You could avoid such a surge by spending less on your remaining cards. For example, your utilization rate would stay at 20% if you could cut your monthly spending in half to $1,000 ($1,000/$5,000=0.20).

Another strategy is to open a new credit card before you cancel the old one. If you can receive a similar or higher credit limit on your new card, your credit utilization could stay nearly the same or even decrease. Signing up for a new credit card could also give you the opportunity to take advantage of a welcome bonus, a 0% intro APR promotion, or a balance transfer offer. Plus, it could keep your credit mix intact if you currently have just one credit card.

It’s generally a good idea to avoid canceling your oldest credit card account, but there are exceptions. Let’s say that after a year of building credit with a secured card, you’re able to open an unsecured card. In this case, you may decide that the short-term credit score impact of closing your secured card and reducing your oldest account age by a year is worth it to get your security deposit back.

Does Closing a Credit Card Ever Help Your Credit Score?

On its own, closing a credit card won’t benefit your credit score. In fact, FICO states plainly that closing “$0 balance or inactive cards will not increase your FICO Scores, and could potentially result in a score decrease.”

After seven years, negative information like late payments will fall off your credit reports, which can provide a boost to your credit score. But that positive impact would happen regardless of whether you kept the account open or closed it.

That said, canceling a credit card could still be the right move if it charges a higher annual fee than it’s worth to you. It might also make sense to close a credit card if it tempts you to spend more than you can afford. In these situations, the financial or personal benefits of closing a credit card could outweigh the potential credit scoring pitfalls.

What Are the Best Alternatives to Canceling a Credit Card?

One alternative to canceling a credit card is to ask your credit card issuer if you can downgrade to a card that has no annual fee. This would allow you to keep the card’s history and credit limit on your credit reports while reducing your cost of card ownership.

You could also consider methods for staying within your budget that don’t involve closing your credit card. For example, you could make your card less accessible by locking it away or cutting it up and then removing the card details from your payment apps and online store accounts.

If these options aren’t available or realistic for you though, canceling the card may be the wisest decision. Just make sure to pay off your outstanding balance and change any automatic bills to other forms of payment before you ask your credit card company to close the account.

Bottom Line

Since canceling a credit card can adversely impact your credit score, you’ll want to carefully consider if it’s the right move for you before moving forward. If the card doesn’t charge an annual fee and isn’t tempting you to overspend, it could make sense to keep it open. But if you ultimately decide that closing the account is best for your overall financial health, there are effective ways to lessen the harm to your credit score.

Written by Clint Proctor. April 6, 2024

Clint Proctor is a lead editor with the credit cards and travel rewards team at Forbes Advisor. After starting his own personal finance blog in 2018, Clint quickly began freelance writing for several national publications including Business Insider, MyFICO, Credit Karma, Magnify Money, ChooseFI, DoughRoller and more. Within a year, he was able to quit his job and focus full-time on creating personal finance content.