Before You Cancel That Credit Card, Read This!

One question that I am asked frequently is: “Will it help or hurt my credit score if I cancel a credit card?”

I can say with certainty that the singular act of cancelling a card will never help your score. And, depending on your credit profile, the negative impact could range from negligible to significant.

In my article “Decoding Credit Score Mystery Math“, I explained the factors that make up your score. The three largest factors are: Payment History (35%), Credit Utilization (30%), and Average Age of Accounts (15%). Let’s have a look at how canceling a credit card impacts these factors.

Payment History

Some readers may feel that closing a credit card where they have a history of late payments will clean up their credit profile. Unfortunately, any delinquencies stay on your credit report for 7 years, and closing the account won’t absolve you of past sins.

Credit Utilization

Cancelling a credit card can significantly impact your Credit Utilization which, in turn, can damage your credit score. Let’s say you have 3 credit cards. Card A has a limit of $2500, Card B also has a limit of $2500, and Card C has a limit of $5000. The sum of your Total Credit Lines = $10,000. You always pay your balances in full, and typically charge $1500 (Total Statement Balances) across all three cards in a given month. Plug those amounts into the formula and you get a utilization of 15%. FICO would consider this healthy credit usage–so do I.

Now, what happens if you cancel Card C, reducing your Total Credit Lines to $5000? Even though you’re only spending the same $1500 monthly, your utilization has now doubled to 30%! That’s a number that the FICO model won’t care for and your score will drop accordingly.

Average Age of Accounts

Since closed credit card accounts stay on your report for 7-10 years, cancelling a card won’t have too much of an effect in the short term. If it happens to be your OLDEST account, you may see a few point drop in your score.

Don’t Cancel if There’s No Annual Fee

Given the potential negative impact to your credit score, even if you think it will be negligible, I would recommend that you never cancel a card that doesn’t charge an Annual Fee. There’s simply no downside to keeping it open. In fact, you should use the card at least once every 3 months so your lender doesn’t close it due to inactivity. That scenario would hurt your credit score as described above AND your credit report will show an account that was closed by the issuer instead of you–another potential blemish.

Evaluate Other Options

For cards that charge annual fees, there are still options besides canceling. Given what you’ve read so far, you may now feel that it’s worth keeping the card and paying the fee to protect your credit score. While that’s a personal choice, it’s probably not necessary.

After you receive your statement containing the annual fee for the card you’d like to close, call the customer service number and see what their retention department has to say. They may offer you incentive statement credits or rewards points that partially or completely offset the fee. Alternatively, they may be able to perform a “product change” to a different card that carries fewer rewards but no annual fee. In this case, you would retain the history, age, and credit line of your existing account so there would be no negative impact on your credit score. These alternatives may not be offered to you if your annual fee has not posted yet, so wait until it shows up on your bill before calling.

Take note of all the alternatives that were presented to you on the call, and then, take some time to consider them; you shouldn’t make a decision immediately. Hang up, evaluate your options and make a decision at your own pace–you have at least a full billing cycle to have the annual fee charge reversed. Before you call back, be sure to read my post, “Do Credit Card Points Expire“. You need to understand what happens to any outstanding points or cash back credits that you’ve earned before you take any action that could jeopardize them.

Ultimately, you may decide that canceling the card is still the right course of action, but at least now, you can do so confidently–knowing that you weighed all the pros and cons, and evaluated all your options first.