Is Closing a Credit Card Bad?

You may want to close a credit card because of unfavorable terms, difficulty controlling your spending, or simply because you’re no longer using it. In many cases, canceling an account makes a lot of sense. However, you should be aware that this decision may negatively impact your credit score, so you better think twice about it. The good news is that you can take some steps to ensure a smooth cancellation and minimize potential negative consequences.

So, does closing a credit card hurt your credit score, and is canceling a credit card bad? Keep reading to learn how to safely get rid of a card you no longer need.

Does Closing a Credit Card Affect Your Credit Score?

When deciding whether or not to close a credit card, most cardholders are naturally concerned about the potential negative effects on their financial well-being.

So, is it bad to close a credit card? There’s no simple answer. It is widely believed that credit card cancellation can negatively impact your credit score, but there are several factors that can change that.

First, if the credit card you’re closing is your oldest, you should be prepared for the average age of your accounts to change and the length of your credit history to be reduced. The length of your credit history is one of the key factors that determines your rating, making up 15% of it — the longer your history, the better your score. Note that while closing your oldest card will reduce the length of your credit history, the closed account may stay on your credit report for several years.

Second, closing your credit card can affect your credit mix, which makes up 10% of your credit score. Credit mix is a metric of how diverse your credit account pool is — the more account types you have, the more responsible borrower you appear to be. A diverse credit mix improves your credit score by demonstrating that you can manage several types of credit simultaneously. Obviously, if the credit card you want to close is your only one, it can significantly affect your credit mix, but overall, it is not a very important factor in calculating your credit score.

Understanding the Effects of Credit Utilization Ratio

If you’re wondering what happens when you cancel a credit card, here’s a fact for you: it can increase your credit utilization ratio. The credit utilization ratio is one of the most important criteria for measuring your credit score. It is a metric that measures how much of your credit you are using compared to your available total. Thus, this parameter demonstrates how well you are managing your debt, and it is recommended to keep it below 30%.

Since closing a credit card reduces your credit limit without changing the debt, your credit utilization ratio will increase. From the point of view of credit bureaus, you will suddenly start using a larger part of your available credit, which means your credit score is at risk of getting lower. This is one of the main disadvantages of closing a credit card.

When Closing a Credit Card is a Good Idea

While closing a card can indeed negatively impact your credit rating, there are cases when all the effects of closing a credit card are worth it. Here are some legitimate reasons for canceling a credit card.

Divorce with a co-owner of your account

If you have a joint credit card with your partner, you may need to cancel it if you are going through a separation or divorce. In this case, closing the joint account, paying off the debt together, and closing out a credit card is the only possible way to resolve all financial issues with your ex.

Bad terms and high fees

When using a credit card, you may find that it comes with high annual fees or interest rates. Paying all those charges may not make sense if you rarely use the card or the benefits you receive are not very valuable to you. If you find that the card is not worth it, you’ll most likely want to close your account and switch to a better card.

Financial difficulties due to temptations

Having constant access to credit is convenient and very useful, but it also comes with potential risks. You may find that you have difficulties controlling your spending, and you are unable to manage your money responsibly. In extreme cases, you may find yourself facing a large debt hole. If you find yourself in a situation like that, ditching your credit card while you seek professional help may be the best course of action.

5 Steps to Successfully Cancelling a Credit Card

If you’re sure that closing your credit card is your best bet, there are steps you can take to protect yourself from the negative consequences of this move. So, how to cancel a credit card safely? Here is a step-by-step guide on closing credit cards without your credit rating falling through the floor.

• Take care of your rewards: Before closing your credit card, make sure you don’t have any unused rewards in your account. You can usually use your bonus points for purchases, convert them to cash, or transfer them. The rewards on your credit card could be airline miles or discounts on purchases—whatever your rewards are, don’t let them go to waste.
• Pay off all your credit card debts: Just because you close your account doesn’t mean you’re free of any outstanding balances. Even if you cancel your card before you pay off your balances, you’ll still have to pay off your debt and interest.
• Call your credit card issuer: Once you make the decision, you should contact your card issuer to inform them and confirm that your account balance is $0. Additionally, you should carefully review your terms of service to see if there are any other actions you must take to close your account.
• Send a certified letter: This is your next step to ensure that the issuer receives your appeal and honors your request. Optionally, you can also request that the issuer send you a letter confirming that your request was honored and that your credit card was successfully closed.
• Take follow-up actions: Now that your credit card has been closed, you should carefully monitor your credit reports. Make sure your credit report is up-to-date and indicates that your account has been closed.

Final Thoughts

So, is closing a credit card bad? Canceling a credit card can have negative consequences for your credit score, but in some cases, it still makes sense. Suppose you have bad terms and high fees on your card, or are experiencing financial difficulties due to the temptations associated with credit money. In such cases, closing the card is the right thing to do.

However, if you want to avoid the potential negative impact on your credit score, you may want to consider alternatives to closing the card — trying to negotiate for better terms and lower fees, upgrading your credit card to an unsecured one without canceling the account, keeping the card for small financial transactions, minor purchases, or automatic payments, as well as practicing various strategies to help you resist overspending. If you do not want the card to remain active, take steps to minimize any potential consequences for your credit score.