- How Closing Credit Cards Could Hurt — Not Help — Your Credit
- Age of Accounts
- Issuers May Close Inactive Cards
- 1) Not Enough Value From the Annual Fee
- 3) Another Signup Bonus
- 4) Divorce
- Closing a Card With a Balance
- What to Do With Old Credit Cards? What Every Cardholder Should Know
- What to Do With Your Old Credit Card
- What to Do About Old and Inactive Credit Cards With an Annual Fee
- When Should You Cancel Your Credit Card?
How Closing Credit Cards Could Hurt — Not Help — Your Credit
Whether you have a card you never use or a pull-your-hair-out experience with a particular card issuer, there will probably come a day when you want to close a credit card. But before you get worked up, call your credit card company, and cancel your card, be sure you understand the potential consequences of that decision.
Closing credit cards could lower your credit scores — but in a few cases, it’s a wise move.
Read on for reasons why you shouldn’t close a credit card account, plus three situations when closing a credit card makes sense, and how to do so safely.
There are two ways that closing a credit card might negatively impact your credit scores:
- It reduces how much available credit you have, and that could increase your overall credit utilization ratio (potentially a big deal)
- It eventually reduces the age of your accounts (not as big of a deal)
An important factor considered in the calculation of your credit scores is your credit utilization ratio. which compares your total available credit to your total balance (or total credit card debt). In general, the lower your utilization ratio, the better your credit scores.
When you close a credit card, you reduce your total available credit (aka credit limits). This can potentially increase your utilization rate if your credit reports show outstanding balances on any of your credit card accounts.
If you close a credit card and your credit utilization rate increases as a result, there’s a very good chance that it will have a negative effect on your credit scores. In fact, depending upon how much your utilization rate increases and the rest of the information on your reports, that card closure could impact your scores significantly.
Here’s an example of how closing a card could increase your utilization rate:
- You have four credit cards with credit limits of $3,000 each, making your total credit limit $12,000. If you carry a $1,000 balance on three of those cards, your total balance is $3,000 — and your credit utilization rate is 25% ($3,000/$12,000 = 0.25).
- If you close your unused card, you’ll reduce your total available credit to $9,000. So, assuming your balance stays the same, your new credit utilization rate will be worse: 33% ($3,000/$9,000 = 0.33).
Remember, the negative impact of closing a credit card varies depending on the other accounts you have on your credit reports. Often, the more credit accounts you have, the higher your credit limits may climb. If you have high limits and low balances on most of your credit cards, closing one of your accounts is less ly to cause big credit score changes.
Age of Accounts
When it comes to credit scores, longer credit history is better.
Credit scoring models, FICO, consider many factors when calculating your scores, including:
- How long it has been since you opened your oldest account
- The average age of all of the accounts on your credit report
A common credit myth leads many people to believe that closing an account will remove the item from your credit reports. A twist on that myth says that the item remains on your reports, but scoring models no longer consider it when calculating your average age of accounts. However, both of the above are untrue.
Positive closed accounts will continue to appear on your credit reports for up to 10 years after they’re closed. They’ll continue to age throughout those 10 years and be counted in your average age of accounts. That’s good for your credit scores.
If you think closing an old credit card will erase bad payment history, think again.
It’s not a magic wand: Payment history, including late payments, will also remain on your reports and affect your scores after you close an account.
The only difference is that, with negative accounts, the Fair Credit Reporting Act typically requires that they be removed from your reports after 7 years, not 10.
Eventually, after 7 to 10 years, closed accounts will no longer show up on your credit reports. That means you’ll lose out on the potential value of the age of the card. In FICO Scoring models, your credit history length is worth 15% of your credit score.
So, while it’s not always going to be the end of the world to have an old account removed from your reports, there is a possibility that the card’s eventual removal could inflict some damage.
As a rule of thumb, it’s better for your credit to keep older accounts with on-time payment history open for as long as you can.
Don’t plan to use your credit card in the near future? That doesn’t necessarily mean you should close it.
Here are five reasons why it’s a smart idea to keep credit cards open:
- Your card will continue to age: As you now know, older accounts on your credit reports can mean better credit scores. If a card isn’t costing you money, why close it?
- Your credit utilization rate may stay lower: Having a card you don’t use will increase your overall credit limit. This can help to keep your utilization rate lower when you do use other cards.
- You’ll maintain variety: Credit scoring models to see a variety of accounts on your credit reports, including credit cards and installment loans.
- You’ll have a backup credit line: It can be pretty useful to have a credit line of a few thousand dollars tucked away for emergencies.
- You’ll have access to benefits: Besides basic rewards points or cash back, your card may also have extra benefits and features you don’t want to lose. (Think: shopping and travel protections and discounts, access to high-end entertainment and services, or brand-specific benefits.)
By paying your balance in full each billing period, you’ll completely avoid interest charges — and continue to reap the benefits. And best of all, cards without annual fees won’t cost you a cent.
If you really don’t want to use your card anymore, consider putting it in a safe spot instead of closing it. That way, it’ll be there if you need it — but won’t tempt you it would in your wallet.
Issuers May Close Inactive Cards
One of the ways card companies make money is through swipe fees when people use their cards.
Maintaining an account costs credit card companies some overhead, so if they’re not making money from you they may close your unused card for inactivity.
You can usually avoid this by using your card at least once every six months.
Earlier we mentioned that closed, positive accounts can stay on credit reports for up to 10 years from the time the account is closed. Even if a credit card issuer eventually closes your account for inactivity, your credit will ly be better off than if you proactively closed the card yourself.
You may have several more months or years between when you considered closing the card and when the issuer actually starts the 10-year clock by closing it for inactivity. Or, if you’re willing to use the card just a few times a year, even for a small purchase, you may be able to avoid having the account closed altogether.
Although there are many reasons to keep your cards open, there are also some good reasons to close your credit cards.
You should consider closing a card if you find yourself in the following scenarios:
1) Not Enough Value From the Annual Fee
If you have an unused card that comes with an annual fee, it’s probably wise to close it.
Unless you’re earning enough rewards or benefits to make up for the annual fee — which is unly if you’re not using it — your card is costing you money instead of providing a valuable service.
Does this sound your situation? Consider downgrading your credit card to a different card without a fee, or product changing to a card you’d actually use. This will (usually) let you keep the same account open, so your credit scores won’t be affected.
If you want to replace the card to continue building credit, opt for one of the many cards without an annual fee.
If you’ve been using a secured credit card and have built up your credit scores enough to qualify for better cards, it may be time to close out your secured card and get your deposit back.
You’ll just need to pay off your balance in full; then you can close the card, and the issuer will send your deposit back.
Now, with higher credit scores and a more established credit history, you can set your sights on reward cards, cash back cards, travel cards, and more!
3) Another Signup Bonus
Some cards, travel rewards cards in particular, offer generous signup bonuses for opening a new card: 50,000 points, for example, after you spend $3,000 in the first three months.
Though these offers are sometimes limited to once per person per lifetime, others give you the chance to get the bonus again after a year or two.
If you already got a signup bonus with a card, but you’re not getting value from it anymore, consider closing it if you might be able to get an introductory bonus again in the future. It may come in handy when you’re planning a trip, or your lifestyle changes and you’re traveling more. Just read the terms and conditions carefully before going this route.
If you share a joint credit card account with a spouse, it can be a big problem during a divorce. With a joint card, both cardholders are legally liable for the debt and can make changes to the account. So, if your ex charges up a huge balance on the account before you separate, you could be left holding the bag financially for his/her shopping sprees.
Your best bet is usually to close joint credit cards during a divorce. This prevents both you and your ex from making any new charges. If you want to protect your credit, you’ll need to continue making payments on the account (or make sure your ex is doing so) until the balance is paid off in full.
Note: If your ex is simply an authorized user on your account (or visa versa), it’s easy to have the other person removed from the account. This stops any future charges from taking place.
But you’ll still have to work together or through the court to make sure any outstanding balance is covered.
Remember, if you’re the primary account holder, you’re not off the hook from a credit perspective until the balance is $0.
Closing a Card With a Balance
If you’re carrying a balance on a card and want to close it, it’s best to pay off the debt first. We recommend the avalanche method.
You don’t need to close your card just because it has a high interest rate, though. You could consider transferring the balance to another card with a lower interest rate. Some cards are designed for this purpose, with a long 0% introductory APR on balance transfers.
When you transfer a balance, there’s no need to close the card you transfer a balance away from — as long as it has no annual fee you’re probably better off leaving it open with a $0 balance and not using it.
Decided that closing a credit card is the right move for you?
Here’s how to do it the right way, so it has the least potential negative impact on your credit scores.
- Completely pay off the credit card balance (and, if the rewards are card-specific — i.e. Chase Ultimate Rewards points instead of Delta SkyMiles — be sure to redeem them so you don’t lose them).
- If you have another card from the same issuer, ask to transfer the old card’s credit limit to the card you’re keeping (therefore maintaining the same amount of total available credit).
- To prevent or minimize any increase in your credit utilization ratio, ask for credit limit increases on any cards you don’t close — or make additional payments to reduce their balances.
- Close your card by calling the number on the back (find customer service department phone numbers here). You can also request a freeze on your card to prevent new charges from being made on it.
Closing a card may take some time, so be patient.
I wasn’t really benefiting much from my Starwood Preferred Guest American Express anymore, so I decided to close it to avoid the annual fee.
Before I closed it, I called American Express and asked if they could transfer the $11,000 credit limit to one of my other American Express cards.
That worked, so I ended up with a $19,000 credit limit on another American Express card that previously only had a limit of $8,000. This kept my credit utilization the same even though I closed a card.
– John Ganotis, Founder, Credit Card Insider
Intelligent credit use sometimes — but not often — means closing credit cards that aren’t working for you.
Weigh the pros and cons first. If you decide it’s time to part with a certain piece of plastic, be sure to follow the above steps to minimize any damage to your credit.
What to Do With Old Credit Cards? What Every Cardholder Should Know
Editorial Note: The content of this article is the author’s opinions and recommendations alone. It may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.
If you have an old credit card account that you no longer use, you should consider whether you want to keep or cancel it. An unused credit card with an annual fee should be canceled in most cases.
But cards with no annual fee ly won't negatively impact your finances, so they're fine to keep around—if your bank doesn’t cancel them due to prolonged inactivity. In this article, we’ll show you what to do with inactive credit card accounts and discuss alternatives to closing them.
Additionally, we’ll discuss why closing credit card accounts can be bad for your credit score.
What to Do With Your Old Credit Card
If you have a credit card you don’t use, you have two options: keep the card open and don’t use it, or close the card. It’s important to understand the positives and negatives of each option before making a decision that can affect your credit or finances in different ways.
If you’re concerned about keeping active credit cards around your home or office, you can cut them up.
First record the credit card number, expiration date and security code, and keep these details in a safe place. This can come in handy for making online purchases or calling customer service.
Call the card issuer and request a new card if you decide you’d to start using the credit card for in-store purchases again.
Some credit card issuers may close your account automatically after long periods of inactivity. Generally, this happens if you haven’t used the card in one to two years.
This time frame varies by card issuer, so check with your bank. To avoid having your account closed, make a small purchase on each of your credit cards every two months to keep your accounts active.
If you cut up your card, use the recorded credentials to make regular, small online purchases.
Some good news: Cards that aren’t actively used and have a zero dollar balance will not hurt your credit score. In fact, they can help raise your score as these accounts add to your credit history and lower your overall credit utilization, which are two important parts of your credit score.
What to Do About Old and Inactive Credit Cards With an Annual Fee
If you have a credit card that you're not using and it has an annual fee, your best option is ly to cancel it. Before you do, call your credit card issuer using the number on the back of your card.
Explain to the customer service representative that you want to close your credit card because of the annual fee.
In many cases, the representative will offer to waive the annual fee, convert your credit card account to a fee-free credit card, or even offer you bonus reward points in exchange for paying the fee. Your outcome may vary, but it’s always worth asking.
When Should You Cancel Your Credit Card?
Generally, you should only close a credit card account in two situations: You no longer use the card and it has an annual fee, or you can’t keep yourself from reckless spending.
In either of these situations, you can close your account by calling the number on the back of your credit card.
The customer service representative will verify your identity and walk you through the process of closing the account.
Secured credit card holders may want to close their secured credit card accounts in order to get their credit line deposit back.
If the card has been paid on time for several months, the secured credit card issuer may offer to convert the secured card to a standard, unsecured card and return the deposit.
However, if you decide to close a secured account, the issuer will refund deposit (by check or direct deposit) you provided when approved for the secured card.
When you cancel a card, you can no longer make charges to it. Make a list of all your automatic recurring charges, online subscriptions and bills, and move them to another card before canceling. Additionally, notify all authorized users as their cards will be closed, too.
If you close a credit card that still has a balance, you’re still expected to pay it you would any other credit card balance. You can transfer the balance of the closed account to another credit card account. However, credit card issuers generally charge a balance transfer fee of 1% to 3% of the balance transferred.
Closing a credit card account may negatively affect your credit score. That is why you should only get rid of old credit card accounts if they are having a detrimental effect to your finances.
Closing your account will impact your overall credit utilization. This refers to the amount of the total available credit you use at any given time.
Closing an old account will immediately shrink this available credit.
This makes your debt-to-available-credit ratio higher, which can seriously affect your credit score if your other credit cards have high balances. Credit utilization makes up 30% of your FICO credit score.
One common misconception is that closing your old accounts will only have a negative impact on your credit score.
Closed credit card accounts will remain on your credit report for 10 years before they’re removed.
This means that accounts closed while in good standing will positively affect your credit score for years to come. By that time, the effects of losing your account history will ly be minimal.