It might seem odd, but closing a credit card can actually hurt your score, especially if it's one of your oldest cards and/or carries a high credit limit.
There are a lot of myths out there surrounding credit scores and credit-related topics. But sometimes a thing that sounds like an urban legend turns out to be true! If you’re skeptical that closing a credit card could hurt your credit score, well, you’re in for a bit of a shock.
Yes, it will affect them—probably for the worse.
Credit scores are complicated, with a number of factors coming together to make up that single three-digit number. There are many different things you can do to hurt your score and many things you can do to help it. Plus, context matters.
“If you have multiple credit cards and cancel a card with a modest credit limit that you’ve only had for a couple of years, there may be very little impact on your credit score,” said Timothy G. Wiedman, professor emeritus of Management and Human Resources at Doane University.
“On the other hand,” he added, “if you only have two or three credit cards and cancel your oldest card that you’ve had for a dozen years that had a $15,000 credit limit (and that was the card with your highest limit), it may matter quite a bit.”
So what gives?
“Credit scores take into account how long you’ve had your credit card accounts and the percentage of your total credit limits that you utilize,” explained Wiedman. “So if you cancel your oldest account (especially if it has a healthy credit limit), it can matter a lot—especially if you only have one or two other (much newer) cards.”
How credit scores work.
In this piece, we cover two different parts of your credit score at length. We don’t want you getting lost, so here’s a brief refresher on how credit scores work.
Your FICO credit score—created by the FICO company—is a three-digit number between 300 and 850. The higher your score, the better your credit.
FICO credit scores are based on information taken from your credit reports, which track your history as a borrower and user of credit over the past seven years. (Some information, however, will stay on your report for longer.)
You score is made up of five different categories of information:
- Payment history: This makes up 35% of your score. Basically, do you pay your bills on time?
- Amounts borrowed/credit utilization: This makes up 30% of your score, and it tracks how much money you’ve borrowed.
- Length of credit history: This makes up 15% of your score. The longer you’ve been borrowing money, and the longer you’ve had revolving accounts (like credit cards) open, the better.
- Credit mix: 10% of your score. What different types of credit (credit cards vs personal loans vs home/auto loans vs student loans) do you have? A more diverse mix is better.
- New credit inquiries: 10% of your score. Have you recently made a bunch of inquiries for new loans or lines of credit? If you have, maybe that’s a sign that you’re desperate to borrow more money …
If you have bad credit and you want to know why, you should order a free copy of your credit report, which you can do by visiting AnnualCreditReport.com. To find out where you need to do better, look at your payment history and your credit utilization. Together, they make up 65% of your total score.
Closing a card hurts your credit utilization ratio.
“Whether you get stung when you close a credit card account depends on a measurement known as the balance-to-limit ratio or credit utilization ratio. This compares how much credit is available to you to how much credit you actually borrow,” explained Stephen Hart, CEO of Cardswitcher.
“A high balance-to-limit ratio, where you borrow a large amount of money, is usually considered a sign of increased financial risk by lenders and a low balance-to-limit ratio is considered good.”
Still not sure how your credit utilization ratio works? Here’s an example from CPA Logan Allec, owner of personal finance website Money Done Right:
“Let’s say you have a total credit balance of $4,000 across all your credit cards. Now let’s say you have a total credit limit across all of your credit cards of $20,000. In this case, your total utilization rate is 20%—or $4,000 divided by $20,000.
“Now, what if one of your credit cards has a $10,000 credit limit, and you cancel it? In this case, your total credit limit across all of your credit cards would go down to $10,000. What would happen to your total utilization rate? It would skyrocket to 40 percent—or $4,000 divided by $10,000, which could adversely affect your credit score.”
For the sake of your credit score, it’s best to keep your credit utilization ratio below 30%. Even if you’re paying off your cards every month, you should try to avoid accruing more than 30% of your total limit at any one moment in time.
And if you’re thinking about closing that one card that has a super high credit limit, maybe don’t.
Closing old cards dings your credit history.
Remember, the length of your credit history doesn’t just measure how long you’ve been using credit, it also tracks how long you’ve been using specific accounts. The longer you’ve had a credit card, the more it helps your score.
“While it’s not as weighty a factor as payment history or credit utilization,” says Allec, “it’s still worth paying attention to.” And he’s right! Closing your oldest card will lower the average age of your accounts, likely dropping your score.
“This is why I keep my oldest credit card—the one I opened in college—open,” added Allec. “Even though I don’t use it because its rewards structure is a boring one percent back on everything.”
And if you’re not certain which of your credit cards is the oldest, Allec offered this tip: “Make a list of all of them and see if you can see online which one is the oldest based on their statement dates.”
Looking to erase past mistakes? Not so fast.
One of the reasons that someone might look to close an old card is because they think it will remove any bad information related to that card from their report.
Unfortunately, it will not.
“Bear in mind that the credit card isn’t erased from your credit record straight away,” said Hart. “Negative entries usually stay on your credit record for around seven years—so it isn’t necessarily a quick fix for making your credit history appear rosier than it actually is.”
“The good news,” he added, “is that positive entries stay on your credit record for much longer—usually a decade.”
Keep them open—just don’t use them.
As you can see, the reasons for keeping an old card open are generally more compelling than the reasons to close it. Still, in case you’re not convinced, here are a couple more common reasons that people close their old credit cards—and ways that you can get around them:
“If your newer cards provide better “reward” deals, just use them as your main cards while using the older, longstanding card once in a while to keep that account active (and keeping its high credit limit as part of your credit file),” said Wiedman.
“If you have high balances on other credit cards, you might find that you’re faced with charges when you try to close your credit card account. A way to avoid this to make sure that you pay off the balances of all your accounts in full before you try to close any,” offered Hart.
“If your reason for wanting to cancel a credit card is its high annual fee, call the credit card company to see if they will waive it for the year,” advised Allec.
Logan Allec (@moneydoneright) is a CPA and owner of the personal finance website Money Done Right. After spending his twenties grinding it out in the corporate world and paying off over $35,000 in student loans, he dropped everything and launched Money Done Right in 2017. His mission is to help everybody—from college students to retirees—make, save, and invest more money. Logan resides in the Los Angeles area with his wife Caroline.
After working in the financial industry for several years, Stephen Hart left his role as Chief Financial Officer at WorldPay to launch the UK’s first payment processing comparison site, Cardswitcher. Nowadays, he helps SMEs save money on their payment processing costs.
After 13 years as a successful operations manager working at two different ‘Fortune 1000’ companies, Dr. Timothy G. Wiedman spent the next 28 years in academia teaching college courses in business, management, human resources, and retirement planning. Dr. Wiedman recently took an early retirement from Doane University (@DoaneUniversity), is a member of the Human Resources Group of West Michigan and continues to do annual volunteer work for the SHRM Foundation. He holds two graduate degrees in business and has completed multiple professional certifications.
Andrew Tavin is a writer, comedian, and a full-time content manager for OppLoans. He graduated with a BFA in TV Writing from Tisch School of the Arts in New York City, worked as a writer for BrainPOP, and created a branded comedy video series for the National Retail Federation called “Interview Day.” He performs around the country and his writing has also appeared on Collegehumor, Funny or Die, and Sparklife.
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The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.