Does Cancelling Credit Card Affect Score?

Cancelling a credit card can indeed impact your credit score, often in ways you might not expect. Understanding these effects is crucial for maintaining a healthy financial profile and making informed decisions about your credit accounts. This guide delves into the nuances of credit card cancellation and its score implications.

Understanding How Credit Scores Work

Before diving into the specifics of credit card cancellation, it's essential to grasp the fundamental principles of credit scoring. Credit scores, such as the FICO Score and VantageScore, are numerical representations of your creditworthiness. They are calculated based on the information in your credit reports, which are compiled by the three major credit bureaus: Equifax, Experian, and TransUnion. Lenders use these scores to assess the risk associated with lending you money, influencing everything from loan approvals to interest rates.

Several key factors contribute to your credit score. While the exact weighting can vary slightly between scoring models, the general categories remain consistent. Understanding these components is crucial for recognizing why cancelling a credit card can have repercussions.

The Five Pillars of Credit Scoring (FICO Model)

The FICO scoring model, widely used by lenders, breaks down credit scoring into five main categories:

• Payment History (35%): This is the most critical factor. It reflects whether you pay your bills on time. Late payments, defaults, bankruptcies, and collections significantly damage your score.
• Amounts Owed (30%): This category relates to how much credit you are using compared to your total available credit. This is often referred to as your credit utilization ratio.
• Length of Credit History (15%): This considers the age of your oldest account, the age of your newest account, and the average age of all your accounts. A longer credit history generally indicates more experience managing credit.
• Credit Mix (10%): Having a mix of different types of credit (e.g., credit cards, installment loans like mortgages or auto loans) can be beneficial, showing you can manage various credit products responsibly.
• New Credit (10%): This factor looks at how many new accounts you've opened recently and how many hard inquiries are on your credit report. Opening too many accounts in a short period can be seen as a sign of increased risk.

Each of these factors plays a role in determining your overall creditworthiness. Therefore, any action that affects one or more of these pillars, such as cancelling a credit card, can potentially influence your credit score.

The Direct Impact of Cancelling a Credit Card

When you cancel a credit card, you're essentially removing an account from your credit report. While this might seem like a simple administrative task, it can trigger several changes that affect your credit score. The impact isn't always immediate and can depend on various factors, including the type of card you're cancelling, your overall credit profile, and how long the account has been open.

The most common ways cancelling a credit card can affect your score are through changes in your credit utilization ratio and the average age of your credit accounts.

Closing an Account: What Happens?

When a credit card account is closed, it typically remains on your credit report for up to 10 years. This is important because it means the account's history, including its payment history, will continue to be factored into your score for a period. However, its credit limit will no longer be considered part of your total available credit. This is where the primary negative impact often arises.

For example, imagine you have two credit cards. Card A has a $10,000 limit and you owe $2,000 on it. Card B has a $5,000 limit and you owe $1,000 on it. Your total available credit is $15,000, and you owe $3,000. Your credit utilization ratio would be $3,000 / $15,000 = 20%.

Now, if you cancel Card B, your total available credit drops to $10,000. If you still owe $2,000 on Card A and $1,000 on Card B (which will eventually be removed from reporting, but for the sake of this immediate calculation, let's consider its limit gone), your utilization on Card A is $2,000 / $10,000 = 20%. However, if you had paid off Card B before closing it, your total available credit would be $10,000, and your utilization on Card A would be $2,000 / $10,000 = 20%. The problem arises if you still carry a balance on the card you're closing, or if closing it significantly reduces your total available credit without a corresponding reduction in debt.

The key takeaway is that closing an account, especially one with a zero balance, reduces your overall credit limit. This can lead to a higher credit utilization ratio, which is a significant negative for your credit score.

Credit Utilization Ratio: A Key Factor

The credit utilization ratio (CUR) is one of the most impactful factors in determining your credit score. It measures the amount of revolving credit you are currently using compared to your total available revolving credit. Experts generally recommend keeping your CUR below 30%, but a score below 10% is considered excellent and can significantly boost your creditworthiness.

How Cancelling Affects Your CUR

When you cancel a credit card, its credit limit is removed from your total available credit. If you have balances on other credit cards, this reduction in available credit will automatically increase your overall credit utilization ratio, even if your total debt remains the same. This is often the most immediate and noticeable negative impact of closing an account.

Example Scenario:

Let's say you have three credit cards:

• Card 1: $15,000 limit, $3,000 balance
• Card 2: $10,000 limit, $0 balance
• Card 3: $5,000 limit, $1,000 balance

Your total available credit is $15,000 + $10,000 + $5,000 = $30,000.

Your total balance is $3,000 + $0 + $1,000 = $4,000.

Your credit utilization ratio is $4,000 / $30,000 = 13.3%.

Now, you decide to cancel Card 2 (the one with the $10,000 limit and $0 balance).

Your new total available credit is $15,000 + $5,000 = $20,000.

Your total balance remains $4,000.

Your new credit utilization ratio is $4,000 / $20,000 = 20%.

In this scenario, cancelling a card with no balance increased your credit utilization from 13.3% to 20%. While 20% is still considered good, a jump like this can negatively affect your score, especially if you were already close to the 30% threshold or aiming for the optimal sub-10% range.

What if the Cancelled Card Had a Balance?

If you cancel a card that has a balance, the situation can be even more detrimental. You'll still lose its credit limit from your total available credit, increasing your CUR. Additionally, you'll still be obligated to pay off the balance. If you can't pay it off immediately, it will continue to contribute to your utilization on that specific card (though it will eventually be removed from reporting after closure). However, the primary impact is the loss of available credit.

Recommendation: If you must cancel a card, it's best to pay off any outstanding balance first. This mitigates the immediate increase in your CUR by not having that balance contribute to your overall debt load after the limit is removed.

Average Age of Your Credit Accounts

The length of time your credit accounts have been open is another significant factor in credit scoring. A longer credit history generally demonstrates more experience managing credit responsibly, which is viewed favorably by lenders and scoring models. This is often referred to as the "average age of accounts."

How Closing an Account Affects Account Age

When you close a credit card account, especially an older one, it can significantly reduce the average age of your open credit accounts. Even though the closed account may remain on your credit report for up to 10 years, its credit limit is no longer counted towards your total available credit, and it stops aging in terms of being an "open" account. The impact on the average age calculation depends on how many accounts you have and the age of the accounts you are keeping open.

Example:

Suppose you have three credit cards:

• Card A: Opened 10 years ago.
• Card B: Opened 5 years ago.
• Card C: Opened 1 year ago.

The average age of your accounts is (10 + 5 + 1) / 3 = 16 / 3 = 5.33 years.

Now, imagine you decide to close Card A (the oldest one).

Your remaining open accounts are Card B (5 years) and Card C (1 year).

The new average age of your accounts is (5 + 1) / 2 = 6 / 2 = 3 years.

In this scenario, closing your oldest account has more than halved the average age of your credit history. This reduction can negatively impact your credit score because it suggests a shorter track record of managing credit.

The Longevity of Closed Accounts on Reports

It's important to remember that closed accounts, as mentioned, don't disappear from your credit report immediately. They typically stay for up to 10 years. During this period, their payment history will still be considered. However, they no longer contribute to the "average age of open accounts" calculation, which is a distinct metric used by some scoring models. The older the closed account, the more it can drag down your average age of open accounts when it's removed from the calculation.

Therefore, if you're considering closing a credit card, think about its age. If it's one of your oldest accounts, the impact on your average account age could be substantial.

Length of Credit History

Closely related to the average age of your accounts is the overall length of your credit history. This metric considers the time elapsed since your very first credit account was opened. A longer credit history, generally 10 years or more, is a strong indicator of financial stability and responsible credit management, contributing positively to your credit score.

How Closing an Old Account Shortens History

When you close a credit card account, especially one that has been open for a long time, it can effectively shorten your reported credit history. While the account might still appear on your report for up to a decade, its contribution to the "time since first account opened" metric diminishes. If it was your oldest account, closing it means the next oldest account's opening date becomes the starting point for this calculation.

Illustrative Example:

Suppose your credit history looks like this:

• First account opened: 15 years ago (Card A)
• Second account opened: 8 years ago (Card B)
• Third account opened: 3 years ago (Card C)

Your longest credit history is 15 years. This is a very positive factor for your score.

If you close Card A, your credit history length calculation might now be based on Card B, meaning your longest reported credit history is effectively 8 years. This reduction from 15 years to 8 years can be a significant blow to your score, as it signals a shorter track record to potential lenders.

The Importance of Older Accounts

Older accounts, even if you don't use them frequently, play a vital role in establishing a robust credit history. They demonstrate a long-term relationship with credit providers. Closing these established accounts can be detrimental because they represent years of positive financial behavior that would otherwise continue to benefit your score.

For instance, a credit card opened in college and maintained responsibly for 15-20 years is a goldmine for your credit report. Cancelling it would erase that long-standing positive history from being the primary anchor of your credit age.

This is why many financial advisors recommend keeping older, unused credit cards open, especially if they have no annual fee. A common strategy is to make a small, recurring purchase on such cards (like a streaming service subscription) and set up auto-pay to ensure they remain active and don't incur late fees, while also preserving their age and contribution to your credit history.

Impact on Rewards and Perks

Beyond the direct impact on your credit score, cancelling a credit card often means forfeiting valuable rewards, benefits, and perks. This is a crucial consideration, especially for cards designed to offer significant advantages to their cardholders.

Loss of Earned Rewards

Most credit card rewards programs, whether they are cashback, travel points, or airline miles, require you to have an active account to redeem them. When you close a card, you typically forfeit any unredeemed rewards. This can represent a substantial financial loss, especially if you've accumulated a large balance of points or miles.

Example:

Suppose you've been accumulating travel points on a premium travel rewards card for several years, planning a significant vacation. If you close the card before redeeming those points, they will likely be forfeited. The value of these points could easily amount to hundreds or even thousands of dollars, representing a loss far greater than any potential minor score improvement from closing the card.

Forfeiting Benefits and Protections

Many credit cards, particularly those with annual fees, come with a suite of benefits that can add considerable value. These can include:

• Travel Insurance: Trip cancellation/interruption insurance, lost luggage reimbursement, rental car insurance.
• Purchase Protection: Coverage against theft or damage for items purchased with the card.
• Extended Warranties: Adding extra time to the manufacturer's warranty.
• Airport Lounge Access: For travel cards.
• Concierge Services: Assistance with booking reservations or travel.
• Statement Credits: For specific purchases like travel, dining, or streaming services.

Closing the card means you lose access to all these benefits. If you regularly utilize these perks, their loss can translate into tangible expenses you'll now have to cover yourself.

Annual Fees vs. Benefits

For cards with annual fees, the decision to cancel often hinges on whether the value of the rewards and benefits you receive outweighs the annual cost. If you find yourself paying an annual fee but not utilizing the card's perks enough to justify the cost, cancelling might seem logical. However, before making that decision, consider if a downgrade to a no-annual-fee version of the same card is possible. This can preserve your credit history and account age while eliminating the fee and potentially retaining some basic benefits.

When Cancelling Might Be Okay (or Even Beneficial)

While cancelling a credit card often has negative implications for your credit score, there are specific situations where it might be a sensible or even beneficial decision. These scenarios typically involve mitigating more significant financial risks or addressing specific account issues.

High Annual Fees with Little Value

As mentioned, if a credit card carries a high annual fee and you are not deriving enough value from its rewards or benefits to justify the cost, cancelling it can save you money. This is especially true if the card's benefits are redundant with other cards you hold or if your spending habits have changed, making the rewards less appealing.

Example: A travel card with a $550 annual fee offers airport lounge access. If you no longer travel frequently or have access to lounges through another card or membership, paying that fee might be financially imprudent. Cancelling it would save you $550 annually.

Predatory or Unfair Terms

If a credit card has excessively high interest rates (APRs), predatory fees, or terms that are exploitative, it might be wise to close the account. Continuing to use such a card can lead to significant debt accumulation and financial hardship. It's often better to incur a small credit score ding than to remain trapped in a cycle of high-interest debt.

Minimizing the Risk of Fraud or identity theft

If you suspect a credit card has been compromised or if you've experienced identity theft and want to ensure all potential access points are closed, cancelling the affected card is a necessary step. While this might have a credit score impact, protecting yourself from fraudulent charges and further identity theft is paramount.

Consolidating Accounts or Simplifying Finances

For some individuals, managing too many credit cards can lead to confusion, missed payments, or overspending. If you have multiple cards with small balances or limited utility, consolidating your credit into one or two primary cards might simplify your financial life and reduce the risk of errors. In such cases, strategically closing less useful accounts could be beneficial for organizational purposes.

Avoiding Unnecessary Credit Inquiries

If you are applying for a mortgage or a major loan, lenders often look at your credit history. While closing accounts generally doesn't remove them from your report immediately, it stops them from being actively managed. If you have numerous small, unused credit cards, closing some might simplify your credit report for a lender, though the primary impact is on utilization and age.

When the Card is No Longer Useful

If a credit card no longer aligns with your spending habits or financial goals, and it doesn't offer significant benefits, keeping it open might not serve a purpose. For example, a store-specific card whose retailer you no longer frequent, or a card with no rewards program, might be candidates for closure if they don't contribute positively to your credit profile in other ways (like age or available credit).

Strategies to Mitigate the Negative Impact

While cancelling a credit card can have negative consequences, there are proactive steps you can take to minimize the damage to your credit score. These strategies focus on managing your credit utilization, preserving account age, and making informed decisions before closing an account.

1. Pay Off the Balance First

If you decide to close a credit card, always aim to pay off any outstanding balance before doing so. This prevents the card's credit limit from being removed while you still owe money on it, which would directly increase your credit utilization ratio. A zero balance on a closed card has no negative impact on your utilization.

2. Consider Downgrading Instead of Cancelling

Many credit card issuers allow you to downgrade a card to a different product within their lineup, often to a no-annual-fee option. This is an excellent strategy because it keeps the account open, preserves its credit history and age, and prevents a reduction in your total available credit. You can then stop using the card or use it for minimal, recurring charges to keep it active.

Example: If you have a premium travel card with a high annual fee that you can no longer justify, check if the issuer offers a downgrade to a basic rewards card. This maintains the account's age and credit limit while eliminating the fee.

3. Keep Your Oldest or Most Benefit-Rich Card Open

If you have multiple credit cards, prioritize keeping your oldest account open, even if you don't use it often. The age of your oldest account is a significant factor in your credit score. Similarly, if you have a card with valuable perks that you use regularly, keeping it open ensures you continue to benefit from those advantages.

4. Make Small, Recurring Purchases on Unused Cards

To prevent an account from being closed by the issuer due to inactivity (which can have similar negative effects as voluntary cancellation) and to keep it active for credit history purposes, make a small purchase on it every few months. A streaming service subscription, a small online purchase, or a tank of gas can suffice. Ensure you have automatic payments set up to pay the balance in full to avoid interest charges.

5. Monitor Your Credit Utilization Ratio Closely

After closing a card, monitor your credit utilization ratio. If it has increased significantly, focus on paying down balances on your remaining cards to bring it back down. Reducing your overall debt is the most effective way to counteract the negative impact of reduced available credit.

6. Understand the Reporting Timeline

Remember that a closed account typically remains on your credit report for up to 10 years. While its credit limit is removed from your total available credit immediately, its payment history will continue to be reported for a period. This means the immediate impact might be more pronounced than the long-term effects, which will gradually lessen as the account ages off your report.

7. Use Balance Transfer Cards Strategically (with Caution)

If you are closing a card because of a high balance and high APR, consider transferring the balance to a 0% introductory APR balance transfer card. This can save you money on interest while you pay down the debt. However, be aware of balance transfer fees and the APR after the introductory period ends. This strategy is more about debt management than score mitigation, but it can indirectly help by allowing you to pay down debt faster.

Alternatives to Cancelling Your Credit Card

Before you decide to cancel a credit card, explore these alternatives that can help you manage your credit and finances without negatively impacting your credit score as severely.

1. Downgrade to a No-Annual-Fee Card

As discussed, this is often the best first step. If your card has an annual fee you no longer wish to pay, contact the issuer and ask if you can switch to a different card product with no annual fee. This preserves your account's history and credit limit while eliminating the cost. You can then use this downgraded card for small, recurring purchases to keep it active.

2. Negotiate with the Issuer

If you're considering cancelling due to a high APR or an annual fee, try negotiating with the credit card company. They might be willing to waive the annual fee for a year, lower your APR, or offer a different rewards structure to retain you as a customer. This is particularly effective if you have a good payment history with them.

3. Reduce Your Credit Limit

If your concern is about overspending or the temptation to accumulate debt, you can request a reduction in your credit limit on a particular card. This will decrease your available credit, but it's a more controlled way to manage your credit utilization than outright cancellation. It also keeps the account open and its history intact.

4. Use the Card for Small, Strategic Purchases

To keep an account active and prevent it from being closed by the issuer due to inactivity, make small, planned purchases on it periodically. Ensure you pay the balance in full each month to avoid interest. This maintains the account's age and its contribution to your overall credit history.

5. Consolidate Debt Wisely

If you have multiple cards with balances, consider consolidating them onto a single card with a lower APR or a 0% introductory offer. This can simplify your payments and save you money on interest. However, be mindful of balance transfer fees and the terms of the new card. This is a debt management strategy, not directly a score preservation tactic, but it can free up credit on other cards.

6. Focus on Paying Down Balances

The most effective way to improve your credit score is to reduce your overall debt. Instead of cancelling cards, focus your financial efforts on paying down balances on your existing cards. This lowers your credit utilization ratio, which is a significant positive for your score.

7. Open a New Card Strategically (If Needed)

If you are closing a card that significantly reduces your available credit or average account age, and you have a strong credit profile, you might consider opening a new, no-annual-fee card. This can help offset the reduction in available credit and introduce a new, albeit young, account to your credit history. However, this should be done cautiously, as opening new accounts also involves hard inquiries and can temporarily lower your score.

Conclusion: Making Informed Decisions

The question "Does cancelling credit card affect score?" is answered with a resounding yes. Cancelling a credit card can indeed have a negative impact on your credit score, primarily by reducing your overall available credit (thus increasing your credit utilization ratio) and potentially shortening the average age of your credit accounts. For older accounts, this can also diminish the length of your credit history, a crucial scoring factor. Furthermore, you risk losing valuable rewards and benefits associated with the card.

However, the severity of this impact varies greatly depending on your individual credit profile, the type of card you're cancelling, and your financial habits. For individuals with multiple credit cards, high credit limits, and low balances, the impact of closing one card might be minimal. Conversely, for someone with limited credit or high balances across fewer cards, closing an account can lead to a noticeable drop in their credit score.

Before cancelling, always weigh the potential score implications against the reasons for cancellation. Consider alternatives like downgrading to a no-annual-fee card, negotiating with the issuer, or strategically using the card for small, recurring purchases. If cancellation is unavoidable, ensure you pay off any outstanding balance beforehand and monitor your credit utilization closely afterward. By understanding these dynamics and employing smart financial strategies, you can navigate credit card decisions with confidence, protecting and enhancing your creditworthiness.