Is It Ok To Close My Credit Cards?
Closing a credit card is probably one of the most misunderstood topics out there. One of the most common misconceptions out there is that closing a credit card will affect your credit score—this turns out to not exactly be true.
This article will discuss the consequences of closing a credit card, proof of impact, and how to navigate deciding on closing a card.
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Consequences Of Closing A Credit Card
Just to review, generally speaking, credit score is calculated using five different parameters:
- Payment History
- Credit Utilization
- Length of Credit History
- # of Hard Inquiries
- Credit Mix
The two major credit score models, FICO and VantageScore, have some minor differences, but those 5 parameters capture the most significant portion of their credit score algorithms
In this section, we will outline how closing a credit card impacts each of the major credit score parameters.
Payment History
When your credit card is closed, it remains on your credit report for 10 years and is factored into credit score calculations for that period. So, that means that closing your card won't magically wipe away late payments; they'll stay with you for quite a few years.
However, if you close a card with no missed payments, your closed account will simply reflect a 100% on-time payment record for 10 years, albeit just for the time period your card was opened.
As you can see in the screenshot below, one of my closed cards shows successful, on-time payments for 39/39 statements. Since this card was closed on May 10, 2022, there are no new payments on this card. Consequently, I will have at least 39/39 (100%) on-time payments on my credit history for the next 10 years (until May 10, 2032).
Sources: Experian, Investopedia
Credit Utilization
When your credit card is closed, your credit utilization will decrease, which will cause a dip in your credit score. This happens because closing any credit card will decrease your total available credit, which increases your utilization rate.
Let's run through a quick example where you have two cards, each with a $1,000 credit limit:
- Card 1: $500 balance, $1,000 credit limit = 50% utilization
- Card 2: $200 balance, $1,000 credit limit = 20% utilization
The total credit utilization here would be the sum of your balances divided by the sum of your credit limits: ($500 + $200) / ($1,000 + $1,000) = 35%
However, if you cancel Card 2 and moved your balance from Card 2 to Card 1 or spent $700 on Card 1, then your credit utilization goes to a whopping 70%. Since your total credit line has decreased, now your credit utilization is prone to increase much more at even the slightest changes.
When your credit utilization exceeds 30%, it starts to have more negative impacts on your credit score.
Sources: LendingTree, Experian, Equifax
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Length Of Credit History
This factor tends to be the most confusing of them all.
The FICO and the VantageScore models differ in how they handle closed accounts in respect to your credit age. While FICO includes closed accounts in its calculations, VantageScore does not; only open accounts are used to determine credit age.
In the case of the FICO score, since a closed credit card still remains on your credit report for up to 10 years after the date of closure, that means that the age of the account will still remain on your credit history. While it's true that closing an older credit card could negatively impact your credit history since it'll decrease the average age of your accounts, the closed card will remain on your credit report for 10 years, so you will not see any immediate impacts to your report until many years to come.
However, in the case of VantageScore, the model will not factor in any closed accounts. So, if you close an older account, your VantageScore will take a bit hit to your average credit age, but your FICO score will not.
Sources: Credit Cards, Nerdwallet
Of Hard Inquiries
Inquiries are a metric pretty independent of closing a credit card. Hard inquiries usually come up whenever you apply for a new line of credit, so if you close a card that you just applied for, it will not impact anything related to your inquiry count.
Deciding To Close A Card
Given the factors we discussed, if you have multiple credit cards, then closing one of your cards is not necessarily the worst thing in the world. Generally speaking, if you have a no annual fee credit card, then it makes little sense to close the card (unless you fall into one of the following buckets):
Difficulties Managing Cards
If you are struggling to manage multiple credit cards and constantly worried about whether or not you are paying cards off on time/missing payment deadlines, it may be time to consider closing a card. Even though it's only beneficial for your credit score to keep no annual fee cards open, if you are having issues keeping track of the cards, it's not worth the hassle and effort.
Annual Fees
If you have a card with annual fees and you aren't using the card, then it might not make sense to keep the card open. Why give the banks money when you aren't even getting anything out of the card?
In these scenarios, I would always try to see if I can downgrade the card to the no annual fee version. This will help me keep the card opened for longer, which is more beneficial for my credit in the long run.
Temptation
If you are worried about overspending on a credit card with high limits, it might make sense to cancel the card so you cannot access that line of credit anymore. However, if you are susceptible to these types of temptations, it may make sense to avoid credit cards altogether—they can be highly predatory traps that can cause you to lose a lot of money.
Conclusions
Closing a credit card can seem like a scary process, but the consequences can be a lot less than they seem. In some scenarios, it may make sense to keep the card open, but if you are struggling to manage your cards, losing money from annual fees, or are tempted by credit, then it may make sense to close your credit card.
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