Does Closing Credit Cards Hurt Your Credit Score?

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Yesterday I wrote 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 positively be impacted by opening new credit cards, including lower credit utilization, more payment history, and increasing your average age of accounts.

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 well over 20 credit cards at the moment, I do sometimes both open and close cards as my spend patterns and card benefits change over time. So 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 impacted in the sense that you have one less card on your report. There are two potential major implications to that:

  • Your credit utilization is calculated based on your overall available credit, so when you close a card your overall available credit decreases
  • Your average age of accounts will be impacted, since the card will no longer be “aging,” though the card will remain on your credit report for years

To better illustrate this, let me give two examples on opposite ends of the spectrum.

Example: how closing a card can hurt your credit

Let’s assume the following scenario:

  • A person has two credit cards, each with a $5,000 credit line
  • This person spends an average of $3,000 per month on their credit cards
  • One card has been open for a year, and the other card has been open for 10 years

If this person canceled the card that they’ve had open for 10 years, I would expect it would have a significantly negative impact on their credit score in two ways.

That’s primarily because this person would go from utilizing 30% of their credit to utilizing 60% of their credit (though one way to “trick” credit utilization is to pay your balance before the statement close date, because utilization is based on the balance at that time).

Furthermore, their average account age would be decreasing over time, as their 10 year old card would no longer be getting older. So if you later decided to get another card, your average account age would go down significantly.

Still, closing that 10 year old card in the above example would have a very negative impact.

Example: how closing a card might not hurt you

Now let me use my situation as an example:

  • I have 20+ credit cards
  • I have so much available credit that my credit utilization is virtually zero (that’s also because I pay my bills before the statement even closes)
  • My average account age is about seven years

For further context, here are some of my credit factors:

If I were to close one of my newer cards, I wouldn’t expect it to have a negative impact on my credit score. That’s because my credit utilization is so low that it wouldn’t materially change.

Meanwhile I have one card 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
Keep No-Annual Fee Cards Long-Term

Bottom line

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.

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Comments

  1. According to my understanding this is incorrect, about the average age of accounts — I think the closed cards factor into the score for another 7-10 years after closing…
    Perhaps somebody can correct me if I’m wrong, but I read this in many places, as well as on Doctor of Credit’s blog– apparently FICO scores consider closed accounts, until they drop off the report, while Vantage scores do not.
    So — there is never a time when closing an account would improve your credit score instantly. Adding a new account always reduces your average age of accounts, affecting your credit score a bit. Closing an account does not affect your credit score for at least 7 years.

  2. Thanks for the overview. I’ve been a bit confused about the average age of accounts issue. So according to this if I open a card I have no intention of keeping, I may as well go ahead and close itafter the first year. ..as least in terms of the average age of account issue? I just downgraded a couple of cards to no annual fee, thinking that to cancel outright would be a bad thing. But maybe outright cancellation would have been better? I don’t need the extra credit line at this point. But I suppose it also factors in with the particular bank in that maybe they look at number of cards closed from their institution. Frankly it seems the number of inquiries maybe the biggie in many cases.
    Also a data point, somehow we messed up my husband’s payment of a $7 boa payment because we had inadvertently clicked something saying no paper statements, we are very old school) and we were shocked how much his credit score dropped, about 40points. But on the other hand, it hasn’t affected his approvals. Another thing I’ve wondered about is do credit card companies stop approvals based on age at some point? But my Dad is almost 90 and still gets approved on regular basis and has quite a few inquiries in the last couple of years.

  3. Yeah, I think James and Gus are right. This article needs more research, I do not believe your understanding is correct.

  4. And if your score is in the 80+0+ none of this really matters that much. You have plenty of room for “adjustments”

  5. @Kate – It probably doesn’t matter much. If your dad is 90, you’re probably in your 50s or 60s. You probably have a long, established credit history. If you have one or two cards you’ve had for years, then opening a few cards and then closing them within a year or two is going to have minor, short-term impact on your credit score.

    Keeping no-annual fee cards open long term can help your credit score. But it also increases your total credit line, which might reduce the additional credit a card lender might be willing to extend to you. If your credit score is very good, they will probably just give you a smaller than usual limit. If you care about that, then you can always reduce the credit limit on the cards you rarely use. So in general, I don’t think there’s ever much reason to close a no annual fee card. (The exception might be banks like Amex which limit the total number of cards you can have from them – so if you want a new product they’re pushing with a big sign-up bonus, you might have to close a card you already have.)

    As for stopping approvals based on age – I doubt banks do that. Even 100-year-olds have expenses, and they usually have at least some steady income from social security. Why would a bank deny them credit just because of age?

  6. I had 2 personal loans that i used for school loans…i. never missed a payment and paid them both off about the same time. The banks reported the accounts closed…but my score went down 30 points..why?

  7. @G.c: this is probably because when loans are finished they are weighed differently than when they are open

    @Kate: the benefit of downgrading vs. canceling is that it will affect the average age of accounts years down the line.
    If you close some cards now and get to the point, 7-8 years later, that those cards finally drop off your report, it would bring your AAoA way down, and your credit score could take quite a noticeable dip.

  8. @ G.c — The benefit of having those loans at all should have stuck around for a bit, but keep in mind that personal/student loans are “installment” loans, not “revolving” loans like credit cards. So when you paid off those loans, you changed the composition of your credit portfolio and the types of credit you had, which also impacts your score. https://onemileatatime.com/build-repair-credit/

  9. I have always been confused by the “30% of your score is your credit utilization (how much credit you’re using compared to your total limits)” …
    Is the 30% based on your total available credit, or is it per account? For example, if I have 3 cards (10K credit limit on each) with $2,500 balance on each vs. the same 3 cards but the entire $7,500 is only on one card with a 10K credit limit. Would my score be better in one case vs. the other?

  10. If they close my credit card, because I don’t use the c.card.. what happens? They close me credit c. The balance is 00, because I don’t use the cc.

  11. Thanks for this article and everyone’s comments.
    I find it eternally frustrating to understand all the factors influencing the credit score.
    Do be honest: It’s a damn jungle and a nightmare !
    Even if you observe ALL things you should, sometimes the score goes down.
    It’s so annoying to me that I don’t even care anymore.
    Since I don’t need a score for anything, I just observe the basics,
    as mentioned above, and apply away for cards to my liking.
    For the record: So far, no one has been able to explain this jungle succinctly.
    This is not meant as an attack on anyone trying to do so … It’s meant as a comment about the absurdity of all that score business.

  12. Thanks for the info. I want to close a Chase card that I almost never use and open a Chase Sapphire Preferred to go along with my Chase Freedom card. Any thoughts on the best way to do this? I was thinking of cancelling my card first and then applying for the new one. Shouldn’t have any problems with 5/24, % usage, etc when I close the first one.

  13. I stopped reading when I read “in reality there are several metrics that can positively be impacted by opening new credit cards, including…increasing your average age of accounts.”

    Can you clarify how opening a new credit card increases the average age of your credit? No, you can’t, because it decreases the average age.

  14. The FICO scoring algorithm is a trade secret, so your calculation about how a FICO score is generated is merely an educated guess, at best.

    And your understanding of the average age of accounts is incorrect. The FICO computer doesn’t care about the reason for the closed account in calculating the average, much like the FICO computer doesn’t care whether a collection account has been paid off or not. It sees either “open” or “closed.”

  15. The biggest change I’ve had in scoring was from closing older accounts. So say what you will, it definitely makes a difference. And that was on all the various types of scoring systems.

    One thing that makes me crazy is with Chase, if I’m AU and my partner has a balance it counts on my credit utilization as well as his. They shouldn’t even report AU’s; the main person is responsible, they applied. There’s no reason to list it on the AU’s report.

  16. For RICHARD POM. & others…
    In re: to the new card u want to open… its my opinion n experience personally (i also worked as a cm serv. Rep/sales for citicards) I would 1st apply for the new card u want with chase(sapphire pref.) and then consider combining the old card u dont want either into the new 1 (sapphire pref) or ur chase freedom thus closing the “old 1” u dont want n the card u combined the old 1 into will have the credit limit of what both the cards had individually. U can always ask for a lower C.L. if u dont want it that high or theyll let u know if they cant give u the total combined amt. Usually u will get the amt of both once combined. Also this is 1 way to get 1 card with a HIGHER CREDIT LINE… usually with any credit card comp. if u have multiple card accts. Say u had 2 crds. Each with a C.L. of $500 u could ask 2 combine the 2 therefore closing one in order to get 1 card with a higher limit. ALSO THIS CAN HELP U TO REDUCE INTEREST by keeping open the acct with lower rate… for ex: u defaulted on 1 card got hit with default apr. 28.99% or w/e it is u could possibly combine that card with another one with same company n close card with higher apr keep card with lower apr open n have the combined C.L. from the 2. I REMEMBER HOW MANY PPL HAD A CITI CARD BUT DIDNT KNOW IT WAS THRU CITI TIL I TOLD THEM FROM SEARCHING FOR LINKED ACCTS.!!! So some of u may also be surprised to learn who really owns ur card or who its thru. Ex: GM card is a citi card… so….hope this helps some of u…

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