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If you’ve decided to close a credit card, it can be scary for two reasons.
First, you might wonder if closing a credit card will cause you to lose the miles and points you’ve earned. We’ve got that completely covered in a different article.
Second, you might be asking “Does closing a credit card hurt my credit score?” The short answer is that, in the long run, if you’re playing the miles and points game well, closing a credit card won’t negatively impact your credit score, but to understand why, we need to make sure we have a good understanding of how credit score is calculated.
We’ll start by taking a look at what parts of your credit score are affected and how. Then we’ll examine why it won’t hurt you in the long run and end with some reminders about how you can avoid closing credit cards unnecessarily.
What parts of my credit score are affected when closing a credit card?
In case you need a refresher, your credit score is calculated with a litany of factors that generally get grouped into five main categories. (Related: How is your credit score calculated?) The two main categories you need to think about when closing a credit card are credit utilization (the amount of money you owe compared to the amount of credit extended to you) and average age of your credit card accounts.
Let’s take a look at each of these credit score factors and how closing a credit card impacts them.
Average Age of Accounts
The simpler of the two factors to explain is the average age of accounts. One major factor affecting your credit score is how long you’ve had credit extended to you. So credit bureaus look at the average age of all your accounts and that factors into your credit score.
The longer (or larger) the average age of your accounts, the better.
This, of course, makes sense because your credit score is a measure of your credit-worthiness and how confidently banks can be when considering to lend you money.
When you close a credit card account, it still contributes to your average age of accounts for ten years. It’s one of those finicky things: even if you’ve only had a card open for a year or two, when it’s closed, it still builds on your overall average age of accounts as if it were still open.
As long as you keep some of your oldest credit cards open, your average age of accounts should be just fine. Don’t go canceling a bunch of old credit cards at once, but in general, I don’t worry too much about my average age of accounts when I’m deciding whether or not to close a credit card.
Credit utilization is a bit trickier to navigate, but the logic still is relatively simple. Credit utilization is the ratio between the amount of credit you are using and the amount of credit extended to you. In other words, it’s the amount of money you’ve borrowed from the banks (money spent) compared to the amount of money you COULD borrow from the banks (the total amount of credit available to you).
One of the cardinal rules in the miles and points game is not to wildly increase your spending while chasing more miles. So, assuming your spending stays relatively constant, if you have a few new credit cards, your credit utilization will improve. That’s because the total amount of money lent to you, the money you spend on your credit cards, remains the same but the total amount available to you, the sum of all your credit lines, has increased.
So you can see how closing a credit card will hurt your credit utilization – if you close a credit card and that credit line is no longer extended to you, it may hurt your credit score. But don’t worry, there are ways to mitigate or even completely eliminate that negative effect if you’re closing a credit card.
How can you alleviate the effects of closing a credit card on your credit score?
There are a couple of ways to alleviate the effects of closing a credit card on your overall credit score. Like we said above, the first thing to do is to make sure you don’t close your oldest accounts. That will really help with your average age of accounts.
Secondly, if you’re in the miles and points game, you should always be thinking about signing up for new credit cards. When you do so, those new credit lines will replace the credit lines of cards that you close so that should mitigate any negative effects on your credit utilization.
Finally, don’t forget that many banks allow you to transfer credit lines from cards you are closing to other cards you may hold with the same bank. Try to preserve as much of your total credit lines from a single bank whenever you are closing cards. If you can transfer the entire credit line of the card you are closing to another card with the same bank, your credit utilization shouldn’t change at all!
Why you shouldn’t worry about closing credit cards for your long term credit score
If you’re following our general guidelines at 10xTravel, you shouldn’t have to worry about closing credit cards affecting your long term credit score negatively. Like I said above, you should be opening new credit cards to replace the credit lines you close – that will protect the credit utilization portion of your score.
And as long as you keep some of your older cards, your average age of accounts won’t take much of a hit either. Remember, closed cards still age for ten years past their close date. Do make sure you keep some solid no annual fee cards in perpetuity, as this will make your average age of accounts keep growing.
Pro tip: Set a calendar reminder for yourself to use your no annual fee cards at least once per year. Many banks will cancel cards for inactivity if they don’t see any usage.
When should you NOT close a credit card?
As you have seen, you shouldn’t worry too much about closing credit cards affecting your credit score negatively. However, if you want to be extra careful, strongly consider keeping a credit card open in the following two situations.
First, if you are thinking about closing your oldest credit card – you probably shouldn’t. Chances are your oldest credit card is a no annual fee card anyway: keep it open so it keeps your average age of accounts high.
Secondly, if you have a credit card with a high credit limit, strongly consider keeping it open. This is especially true if it’s your only credit card with a bank, since you won’t have options to keep that credit line alive. Losing a ton of credit available to you will hurt your credit score in the short term, although as you get new cards your credit utilization will improve again.
Ways to keep credit cards open
If you’re trying to keep a credit card open, just remember there are many ways to do this. You can:
- Ask for a retention bonus or annual fee waiver. This can offset the cost of keeping the card or allow you to keep it for an extra year.
- Downgrade the card to a no annual fee card at the same bank. This keeps your credit line alive and generally keeps the account alive too for aging purposes.
- Product change the card to another card you would prefer, even if it’s a card with an annual fee.
Really, before you close a card you should always be looking for a retention bonus – the worst they can say is that there’s no offer.
Things to do before closing your account
If and when you finally do close that credit card account, resting comfortably in the knowledge that it won’t hurt your credit score in the long run, do remember to:
- 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. It also can just get annoying to pay if you lose online access, etc.
- 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.
- 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.
- Close your oldest credit card,
- Close too many accounts in a short period of time, causing your utilization to rise significantly,
- Just cut up your card and expect your account to be closed for you.
If you’re worried about the effect of closing a credit card on your credit score, you’re not alone. All the information out there can definitely be confusing! But if you focus on keeping your oldest cards open and keeping as many credit lines intact as possible (or getting new credit lines with new cards), in the long run your credit score will be just fine.
Editors Note: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, hotel, airline, or other entity. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post.