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If you no longer use your credit card and are considering closing it, know how that will impact your credit score and any rewards you’ve earned before you act.
We’ll walk through what to expect if you do choose to close a credit card and provide alternative actions you can take to protect your credit score.
How your credit score is affected when you close a card
Closing a credit card account can hurt your credit score in two ways:
1. By reducing your credit utilization ratio
Credit utilization is the total amount of debt you’re carrying divided by the amount of credit that’s available to you across all credit card accounts as well as individual accounts. Closing a credit card decreases your available credit, so your utilization rate would rise if you are carrying balances on any other cards.
Let’s take an example where you spend $600 a month across two credit cards:
- Card A: $400 balance and $800 credit limit = 50% utilization
- Card B: $200 balance and $1,000 credit limit = 20% utilization
To find your total utilization, add the balances from both cards ($400 + $200) and divide by the cards’ total credit limit ($800 + $1,000). So, you would divide $600 by $1,800 and get 33%. If you closed Card A, and still spent $600 a month (but now only on Card B), your utilization would increase to 60%. Credit scoring experts recommend having a credit utilization ratio of 0% to less than 30% to achieve a high credit score
2. By decreasing your average length of credit history
The average amount of time you’ve had credit makes up 15% of your credit score. While not the most important factor, it’s key to have a lengthy credit history. A long credit history coupled with responsible credit use helps your score. When you close an old credit card, your average length of credit history will decrease, and those who are newer to using credit will suffer more than those who’ve been borrowing and repaying for decades. For example, if you have a card that was opened 10 years ago and another that was opened 5 years ago, your average length of credit is 7.5 years. Closing your oldest card would decrease your average length of credit history to 5 years.
What happens to rewards when you close a card?
If you have a rewards or cashback card, you generally earn points, miles, or cash back with every purchase. What happens to those rewards when you close your account varies by issuer, so you should refer to your cardmember agreement. Depending on the card you have, rewards may be immediately forfeited, such as American Express Membership Rewards® cards, or credited to the account as a statement credit if a balance remains or a check, like Discover cards.
If you have a co-branded card with an airline or hotel chain, the points you’ve earned typically will be stored with that brand’s loyalty program rather than managed by your card issuer. Points or miles you earn on an airline or hotel co-branded card are transferred from your card issuer to the airline or hotel program. So, if you close your card, the rewards you’ve earned should still be available through the airline or hotel program and subject to their rewards terms. The only exception may be points and miles that may have been earned, but have yet to be transferred to the airline or hotel program.
To be safe, redeem or transfer any points, miles, or cash back you’ve earned prior to closing a card so you don’t risk losing them.
Better options than closing a credit card
Keep your card open, but use it sparingly
Maybe you’ve stopped using your credit card because your spending habits have changed or you’ve opened a better card. If your credit history is sparse, consider keeping the card open and using it for a regular monthly bill to keep it active. That way you won’t run the risk of the issuer closing it for inactivity, and you’ll protect your credit score from falling by keeping that line of credit open.
Downgrade an annual fee card to a no-annual-fee card
If you have a high annual fee card that you want to cancel, consider calling your card issuer and ask to be downgraded to a no-annual-fee card instead. Many issuers are willing to work with you, especially if you have a good relationship. Downgrading your card is a great way to prevent the negative effects of closing a card. Just remember to keep the account active by making a purchase (and paying it off) every month.
Still want to close that old card? Open a new card first
If you’re still set on getting rid of a card you no longer want or use, you could consider applying for a new card that will better suit your needs — perhaps one with no annual fee or rewards that you may covet. Before your credit score takes a hit by closing the old card, apply for a new card first. Yes, the hard inquiry will knock a few points off your score for a little while, but you’ll get a new credit line that will protect that all-important credit utilization ratio. Then, once you have the new card in your wallet, you can go ahead and cancel the old card.
Closing a credit card is rarely a good idea, but it may be the right path for some. If you’ve reviewed alternatives such as keeping your card and using it occasionally or downgrading an annual fee card, but still want to close your account, beware of the potential negative effects. And, if you’re closing a rewards or cashback card, make sure points, miles, and cash back are redeemed prior to closing the credit card account.