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Does Closing a Credit Card Hurt Your Credit Score?

Credit Report

Today we are going to tackle one of the most common questions I get.

Does closing a credit card hurt your credit score?

Let’s start with a succinct answer.

Closing a credit card will likely have little to no effect on your credit score.

Boom. I said it.

Now before you send me an email telling me I’m wrong because your grandma/boyfriend/parent/friend who studied Finance for 2 weeks told you otherwise, hear me out.

Remember that credit advice is a lot like fitness advice.

It’s not always logical, the vast majority of people have absolutely no idea what they are talking about, yet nobody hesitates to dish out (usually terrible) advice.

Stick to the Facts

So let’s stick to the facts.

There are only 2 potentially adverse effects of closing a credit account.

1. An Increase in Credit Utilization

Credit utilization refers to how much of your available credit you use on a monthly basis.

It is calculated by taking your current credit balances and dividing them by your total credit limits (A $500 balance on a credit limit of $1,000 = 50% utilization).

Generally speaking, higher credit card utilization will lead to a lower credit score.

Credit Utilization

Closing a credit card reduces your total available credit (the denominator), which causes your credit utilization to rise, which could cause your credit score to fall. Here’s a quick example of how this works..

Let’s say you have the following credit cards:

Card A: $500 balance on a $1,000 limit

Card B: $500 balance on a $1,000 limit

Card C: $0 balance on a $5,000 limit

You would have a total utilization of ($1,000 total balances / $7,000 total limits =) 14.2%. Which is great.

 

Now let’s say you cancel credit card C:

Card A: $500 balance on a $1,000 limit

Card B: $500 balance on a $1,000 limit

Card C: $0 balance on a $5,000 limit

This would reduce your total credit limit by $5,000, causing your utilization to jump to 50%. ($1,000 divided by $2,000)

Your credit score would likely drop a few points as a result.

So how do you prevent this from happening?

Simple.

  1. Don’t cancel credit cards that have high limits
  2. Replace any cancelled credit cards with new ones  (I do this >15x per year)

 

2. Closing Your Oldest Account

The second potentially adverse effect of closing a credit card is the loss of your oldest credit account.

Your length of credit history (15% of your FICO Score) is determined by the age of your oldest account, the age of your newest account, and the average age of all of your accounts.

Credit History

So closing your oldest account would likely cause your score to fall.

How do you prevent this from happening?

Simple. Don’t close your oldest credit card. Ever.

But what about cards that aren’t your oldest account?

Wouldn’t closing them reduce your average age of accounts, therefore potentially damaging your credit score?

Not really. Here’s why.

When you close a credit account it stays on your report and continues to age for 10 years.

So even if you cancel a credit card after a year or two it will continue to build history on your credit report as if it were still open.

(Don’t forget the potential impact of credit utilization though)

So what should you do before closing a credit card?
Things to do before closing your account:

  • Redeem any points/miles that are left in your account

Sometimes closing a credit card will cause you to forfeit your points/miles and sometimes it won’t. Here’s a quick article on how to tell.

  • Pay off your balance

Some credit cards companies will let you close an account that has a balance on it but it’s always easier if you pay it off first. Otherwise you might forget about it, which would severely damage your credit score.

  • Don’t just cut up your card

Destroying a credit card doesn’t automatically close your account. You have to actually request that it be closed.

So how do you do that?

How to cancel a credit card:

Unless you are a masochist, do not attempt to do this over the phone.

You’ll get transferred to the retention department, where you’ll wait on hold for a while before being bombarded with retention offers.

Instead, log in to your credit card account, find the secure message center, and send them something like this.

Hello,

I find that I am not using this credit card very often and would like to close it. Please cancel this credit card account effective immediately. Thank you for your time.

Bryce

Feel free to copy and paste this, but don’t forget to change the name.

To recap:

Do:

  • Make sure you have high enough credit limits to keep your credit utilization low
  • Cancel credit cards that you don’t use if they charge an annual fee
  • Make sure you won’t lose your points/miles by cancelling the card

Don’t:

  • Close your oldest credit card
  • Close too many accounts, causing your utilization to rise significantly
  • Close your credit card over the phone (unless you love pain)
  • Just cut up your card and expect your account to be closed for you

 

Happy Travels,

Bryce

Photo credit: Tumblr.com, LeaveDebtBehind.com, money.usnews.com

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