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
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.