I’ve written about the common misconception that applying for credit cards hurts your credit score.
While it’s true that an inquiry on your credit report can ding your score a couple of points short term, in reality there are several metrics that can be positively impacted by opening new credit cards, including lower credit utilization and more payment history.
What matters most is that you don’t utilize too much of your credit, that you make your payments on-time, and that you maintain a decent average age of your credit card accounts.
In this post I wanted to answer another question I get all the time — what impact does closing credit cards have on your credit score?
While I have over 25 credit cards at the moment, I do sometimes both open and close cards as my spending patterns and card benefits change over time. Let’s take a closer look at how your credit score is impacted when you close cards.
How is your credit score calculated?
For some context, first let me post a quick refresher of how your credit score is calculated (if you already know this, by all means skip this section).
Your credit score is made up of the following components:
- 35% of your score is your payment history (the percentage of payments you’ve made on-time)
- 30% of your score is your credit utilization (how much credit you’re using compared to your total limits)
- 15% of your score is your credit age (the average age of your open accounts)
- 10% of your score is the types of credit you use (how many different types of requests for credit you have)
- 10% of your score is your requests for new credit (how many times you’ve applied for credit)
Your takeaway here should be that if you make your payments on-time, don’t utilize too much of your credit, and keep your average account age fairly old, that’s 80% of your credit score right there.
How is your credit impacted when you close a credit card?
When you open a card, you get an inquiry that counts as a small “ding” on your credit score (though it can go up due to other factors). There’s no such thing when you close a card.
When you close a credit card, your credit score is potentially impacted in a couple of ways.
Your credit utilization may go up when you close cards
When you close a credit card, your credit utilization may go up. This metric is calculated based on your overall available credit, so when you close a card your overall available credit decreases.
Let’s use the following example:
- A person has two credit cards, each with a $5,000 credit line, for a total of $10,000 in available credit
- This person spends an average of $3,000 per month on their credit cards
If both cards are open that person’s average utilization would be 30%. However, if the total available credit is suddenly $5,000 (due to a card closure), that person’s card utilization rate would double, to 60%.
Note that one way to mitigate the impact of this is to just pay off your card balance before the statement close date. That’s because your utilization is calculated based on your balance as of the statement closing date.
What happens to your average age of accounts when you close cards?
A common point of confusion is what happens to your average age of accounts when you close a card. The reality is that this metric could be impacted long term, but when you close a credit card it continues to show on your credit report (and continues to age) until it falls off after up to 10 years.
Let’s use the following example:
- A person has two credit cards
- One credit card has been open for two years, and another credit card has been open for four years, meaning that person’s current average account age is three years
If you were to cancel the card you’ve had for two years, what would your average age of accounts be in two years?
- One card would be six years old
- One card would be four years old (the closed card continues to accrue age, even for the two years since it was closed)
That means your average age is now five years, which is better than before. At some point (up to 10 years after you close the card) it will fall off your account and no longer contribute to your average age of accounts, but that’s not immediate.
Example: how I’m not greatly impacted by closing cards
Now let me use my situation as an example:
- I have 25+ credit cards
- I have a lot of available credit and also typically pay my balance before the statement closes, so my utilization is just 1%
- My average account age is over six years
For further context, here are some of my credit factors:
In my case I have a sufficiently established history so that opening or closing a card has very minimal impact on my credit score.
One thing that has really helped is that I have a few very old cards, including one that has been on my credit history for 30 years (see this post for how that’s possible). I expect that if I closed that card, it would have a negative impact on my score long term, once that eventually falls off my report.
Strategies for minimizing the impact of closing credit cards
While there’s no magic formula here, in general I have a few takeaways and recommendations:
- Hopefully this demonstrates the value in keeping some no annual fee cards for a long time, since this can really help your credit score
- In the event that you’re no longer getting value out of a card that you’ve had for a long time, call and see if there’s an option to downgrade it to a no annual fee card, so you can at least keep it on your credit history
- If you’ll be greatly impacted by increased credit utilization, pay almost your entire credit card bill before the statement even closes, since it will show a very low utilization that way
As a general rule of thumb you shouldn’t be scared to close credit cards as part of a well balanced strategy. The key is to make sure that canceling a card won’t greatly increase your credit utilization (though you can partly get around this by paying your balance before the statement even closes).
In the event that you have had a card for a long time, there’s potentially a lot of value in holding onto it, so you can always call the credit card company and see what downgrade options are.
If you’re fairly new to credit cards, this is also why there’s so much value in picking up some lucrative no annual fee cards early in your credit journey, so that those can help boost your credit score long term.