What Canceling a Credit Card Does to Your Credit Score

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Updated on Friday, September 25, 2015

Very Upset Woman Holding Her Many Credit Cards.

To answer the question “how does canceling my credit card affect my credit score?” you need to understand how your credit score is calculated. Your credit score is based on the following five factors: amounts owed (utilization), payment history, length of credit history, credit mix, and new credit.

When you cancel a credit card, you may affect several of the factors that make up your credit score. While there is no specific answer as to how many points your credit score will actually be affected when you cancel a card, it’s well known that it will, in fact, be affected negatively.

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Credit Utilization

Credit utilization is the factor that is most likely to be affected if you cancel a credit card. Your credit utilization is part of the “amounts owed” category that accounts for 30% of your credit score. Credit utilization compares your credit card balances to your credit limits. When you close a credit card, you are closing an entire line of credit, which could make your utilization ratio worse because you’re decreasing the available credit limit you have. Unless you decrease your spending after you close a card, or open a new card, you are likely going to negatively affect your utilization ratio.

How your specific credit will actually be affected depends on a number of things, including whether you have a balance on the account you’re closing and whether you have balances on other credit cards you have open. If you have no debt or little debt on the card you’re closing, but more debt on the cards that you’re keeping open, then you will probably increase your credit utilization (like in the example above). This will have a negative impact on your score. However, if you spend 20 percent or less of your remaining credit limit and you always pay off your bills on time and in full, your score won’t be harmed as much from a utilization perspective.

For example, if you have three credit cards with $2,000 limits on each, and a $200 balance on the first card, a $500 balance on the second card, and a $700 balance on the third card, your total credit limit is $6,000 and the total credit you’re using is $1,400. If you pay off and close the first card, your total credit limit becomes $4,000 and the total credit you’re using becomes $1,200. When you had all three cards your utilization ratio was 23% ($1,400/$6,000). After you closed the first card your utilization ratio became 30% ($1,200/$4,000). In this example, by closing one line of credit, you increased your utilization ratio, which has a negative impact on your credit.

The bottom line is that you want to still keep your credit utilization at 20 percent or less when you close your card. Otherwise, it will have a negative impact on your credit score.

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Payment History

Canceling a credit card won’t immediately affect the payment history category that factors into your credit score, which accounts for 35% of your credit score. This is because the payment history of any account you close will remain on your credit report and be factored into your credit score for seven years for negative history and ten years for positive payment history. So, just because you close an account does not mean it stops impacting your credit – in fact, it will continue to be a part of your credit for a long time.

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Length of Credit History

A third category that will be affected by canceling your credit card is the length of credit history, which accounts for 15% of your credit score. After you cancel your card, whether it’s seven or ten years later, eventually, that card history will drop off your credit reports and no longer be included in calculating your score. This could negatively affect your credit if it was your oldest account and the other accounts were much newer. Because of this, you should consider how long you’ve had credit cards before canceling them. It’s generally better to close a newer account than an older account because you can maintain a longer credit history this way.

Credit Mix & New Credit

If you cancel a credit card and it was your only credit card, then you are removing an entire category of a source of credit, which will affect your “credit mix” (10% of your score). This indicates your ability to handle a variety of credit, commonly: student loans, mortgages, personal loans, auto loans and credit cards. A credit card is the only way to be building that credit score without paying a penny in interest. If you pay your statement off on time and in full each month, then you’re establishing a score without giving the bank money. Cancelling your own credit card removes one of the ways you can prove to a lender you’re a reliable borrower, which can lower your score.

If you are canceling a credit card, this won’t affect the “new credit” category, which makes up 10% of your score. This is because the very nature of canceling a card means that you are getting rid of credit, not opening new credit.

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3 Tips to Consider Before Canceling a Credit Card

Knowing that your credit score may take a hit if you cancel one of your credit cards, you should consider the following factors before making the decision to close a card.

  1. Consider canceling cards that cost you money. If you pay high fees on any of your cards, these are the cards you should consider canceling first. It doesn’t make sense to keep a card open that is costing you a lot of money.
  2. Consider upcoming financing you’ll be doing. If you are applying for financing, such as a mortgage, you want as high of a credit score as possible. Therefore, you should avoid doing anything that will decrease your credit score before you get financing.
  3. Consider negotiating with the credit card company. If you want to cancel a credit card because of a high fee or a high interest rate, call the company and negotiate better terms. Often, credit card companies will work with you because they want to keep you as a customer. This may be a better option for you if you can get more favorable terms.

A Final Word

Canceling a credit card may negatively affect your credit score because it will affect your credit utilization ratio, payment history, length of credit, and credit mix. That said, there are reasons to cancel a credit card, especially if you are overspending or paying high fees and interest. The exact number of points that your score could go down varies – there’s no way to know fore sure. This is why you should look at your entire financial situation and make the decision that is best for you before you cancel a credit card.