If you’re thinking about cleaning up your credit report by closing a credit card account you haven’t used for years, you’ll probably want to reconsider that plan. That’s because closing a credit card account can actually lower your credit score. How? First, by potentially reducing the length of your credit history, especially if you’ve had the account for a long time, and second, by reducing your available credit. Let’s break it down further.
Does Closing a Credit Card Hurt Your Credit Score?
The length of your credit history makes up about 15% of your major credit scores, including your FICO credit score. The category takes into account how long you’ve had credit and looks at the opening dates on all of your accounts. Taking years off of your credit history can either lower your score or do nothing (if the card isn’t that old), but never help your score.
Additionally, your available credit has a direct impact on your credit utilization rate, which is how much debt you owe versus your total available credit limit. Your credit utilization rate accounts for 30% of your credit score. When the limit (of the closed card) is taken out of utilization calculations, you’re using a higher percentage of the credit available to you.
That’s a problem because your utilization rate should never exceed 30%. Ideally, you’ll utilize 10% or less of the credit you’re allotted.
So, in terms of your score, closing unused credit card accounts is one of the biggest mistakes you can make. If you want to build your credit, simply leave them open. Having numerous credit cards isn’t necessarily a bad thing, and it can be a way to protect yourself from huge dings to your utilization rate. That being said, you shouldn’t carry balances on any of these cards, and you also shouldn’t let the accounts be completely inactive. Strike a balance with your cards in order to be able to do the least damage to your credit.
Should I Close a Credit Card?
With those points in mind, Thomas Nitzsche, media relations manager for ClearPoint Credit Counseling Solutions, said he advises clients to weigh their options carefully when it comes to closing a credit card.
“It’s important to remember that most of your credit score is based on payment history, so if you have an account with a long history of good payments you should generally keep it open,” Nitzsche said. “If the card does not carry a fee or have a high balance, I usually recommend that they keep the account open, particularly if they have had the account a long time.”
If the annual fee is the issue, Nitzsche said you can contact your issuer to see if they’ll waive it in exchange for keeping the account open. However, “if the client is in high credit card debt, then it could be in their best interest to close the account in exchange for a lower interest rate, as in a Debt Management Plan or creditor financial hardship plan,” he said.
A good card to close, if you must, is a newer card that doesn’t have a balance on it. That way you don’t hurt your credit history or your utilization rate as much. If a credit card issuer suddenly changes your APR or annual fee, you can also close a card in order to escape these terms and save yourself from fees.
If you’re considering closing a credit card account, here are some important things to remember:
Why Closing a Credit Card Account Hurts Your Credit History
Positive credit information, such as a long-established credit card account with a positive payment history, may stay on your credit report indefinitely. But when you close an account, it’s usually removed from your credit report within 10 years.
Once that account is wiped from your credit report, you lose the credit history associated with the account. So do your credit score a favor and very carefully consider keeping old credit card accounts open. You may want to check your credit scores before you close an account. You can get a free credit score on Credit.com.
If you think you’ll be tempted to use a card if it’s still open, you can always cut it up, put it in your safety deposit box at the bank or even put it on ice, literally, by freezing it like some people do in a block of ice.
Why Closing an Account Hurts ‘Credit Utilization’
The amount of revolving credit card limits you are currently using is called your revolving utilization. Let’s say you have a credit card with a $10,000 limit and a $2,000 balance. You are utilizing 20% of your credit line.
To maximize your credit scores, you’ll want your revolving utilization to be as low as possible, with 10% or lower being ideal for most people.
An open credit line with a roomy limit and zero balance will help to lower your revolving utilization, especially when you carry balances on other accounts. So consider keeping your revolving utilization low by leaving old accounts open and their balances low.
If You Do Close Your Credit Card…
Once you decide that the hit to your credit scores is worth it—let’s say you have a joint credit card account with your spouse but you’re going through a divorce — there are a few things you’ll want to keep in mind.
First, don’t close your credit card if it’s the only one you have. The mixture of credit accounts you have is extremely beneficial, as account mix accounts for 10% of your credit score. If you have a variety of loans and close your only credit card, your score will most likely suffer.
Remember, you may be able to close a card with a balance, but you’re still going to have to pay off the purchases—and you’ll want to aim to do so right away since that available credit limit will be gone once the card is closed, even if those charges aren’t. Closing a card with a balance reduces your credit limit to zero but leaves the balance, so it might look like you’ve maxed out card when in reality you’ve merely closed an account. Of course, you can always transfer the balance to another card, preferably one with a 0% balance transfer offer (bear in mind you’ll likely still pay a nominal transfer fee) and then close the account.
Then, you’ll want to confirm with your issuer that your card doesn’t have a balance before you turn a blind eye towards the account. Be sure to check your account to make sure there are no outstanding charges or fees that could go through and then later show up as missed payments—which can also do big damage to your credit score.
Send a notice to your card issuer explaining that you’re closing your card. You can also call ahead, but having everything in writing is beneficial for both your records and in case of errors. Finally, after you’ve canceled, it’s a good idea to get written confirmation that the account is closed and the balance is zero. You can send a certified letter to your issuer’s customer service department requesting a confirmation letter.
What to Do After Your Credit Card Is Canceled
Credit reporting agencies will be alerted of any closed accounts within a month, but as we mentioned, the positive effects can last for 10 years. If you only closed one account, make sure you think before closing another account, or multiple, right afterwards because the negative effects on your score could be drastic after the 10 year period is up. Your credit history is important, so you should hold onto your other long-standing credit accounts if possible. Additionally, you should be responsible with your remaining lines of credit and focus on using them without affecting your credit utilization rate. By keeping those accounts open and using your credit cards at least once a month, you can build your credit, or at least negate any potential score decreases that might come from canceling a card.
Hannah Maluth contributed to this article. It has been updated and was originally published November 29, 2016.