Does It Hurt Your Credit Score to Close a Credit Card Account With a Zero Balance?

In the realm of personal finance, few topics spark as much debate as the impact of closing credit card accounts. While conventional wisdom advises against it, there’s a growing chorus of voices suggesting that closing a card with a zero balance might not be the credit score apocalypse it’s often portrayed to be

So, where does the truth lie? Can you bid farewell to a dormant credit card without jeopardizing your creditworthiness? Let’s delve into the intricacies of this financial conundrum.

The Potential Pitfalls of Closing a Credit Card

Before we explore the nuances of closing a zero-balance card, let’s acknowledge the potential downsides. Your credit score, a numerical representation of your creditworthiness, is influenced by several factors, one of which is your credit utilization ratio. This ratio measures the amount of credit you’re using relative to your total available credit. Closing a card, especially one with a high credit limit, can increase your utilization ratio, potentially lowering your score.

Furthermore, the age of your credit history plays a significant role in your score. Closing an older card can shorten the average age of your accounts, which could negatively impact your score.

However, it’s crucial to remember that these potential downsides are not absolute If you have multiple credit cards with low balances, closing one with a zero balance might not significantly impact your utilization ratio. Additionally, the negative impact of a shortened credit history can be mitigated over time as your remaining accounts age.

The Case for Closing a Zero-Balance Credit Card

While closing a zero-balance card can potentially affect your credit score, there are situations where it might be the prudent course of action.

1. Avoiding Annual Fees: Some credit cards come with hefty annual fees. If you’re not actively using the card and don’t plan to in the future, closing it can save you money in the long run.

2. Minimizing Temptation: Having several credit cards can lead to overspending for some people. Closing a credit card that you don’t use often can help you avoid overspending and manage your money.

3. Streamlining Your Finances: Managing multiple credit cards can be time-consuming and overwhelming. Closing unused cards can simplify your financial life and make it easier to track your spending.

The Art of Closing a Credit Card Strategically

If you’ve decided to close a zero-balance credit card, there are a few steps you can take to minimize the potential impact on your credit score.

1. Pay Off All Outstanding Balances: Make sure you’ve paid off all outstanding debt, including any yearly fees, before canceling any credit card. This will prevent any negative marks on your credit report.

2. Consider Your Credit Utilization Ratio: If you have multiple credit cards with low balances, closing one with a zero balance might not significantly impact your utilization ratio. However, if you have few cards with high balances, closing one could have a more noticeable effect.

3. Prioritize Older Accounts: If you have several cards that are all balance-free, you might want to close the more recent ones first. This will help preserve the average age of your credit history.

4. Monitor Your Credit Report: After closing a card, keep an eye on your credit report to ensure the closure is reflected accurately. You can access your free credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) once a year at AnnualCreditReport.com.

The Bottom Line: A Nuanced Decision

Ultimately, the decision of whether or not to close a zero-balance credit card is a personal one. There are potential downsides to consider, but there are also situations where it can be a beneficial move. By carefully weighing the pros and cons, you can make an informed decision that aligns with your financial goals.

Remember, responsible credit card management is key to maintaining a healthy credit score. Always use your cards wisely, pay your balances on time, and keep your credit utilization ratio low. By following these principles, you can navigate the world of credit cards with confidence and ensure your financial well-being.

Too Much Temptation

Some people find the temptation to use credit cards—especially store credit cards—too much to resist. And while for some people this would be a good reason to cancel a card, there are other ways to cut back on spending without lowering your credit score.

For example, you could remove your credit cards from your wallet and store them in a safe place. By not having your cards readily available, you may find the temptation easier to resist.

Once a credit card is canceled, you won’t be able to reopen the account.

Closing a Credit Card Won’t Impact Your Credit History

It’s possible that you’ve heard that when you close a credit card, you “lose credit” for the duration of the account. That is mostly a myth.

Closing a credit card won’t immediately remove it from your credit reports, according to credit expert John Ulzheimer, who was previously employed by Equifax and FICO. “In both the FICO and VantageScore branding credit scoring models, the age of the account will continue to be valued as long as the credit card is listed on your record. According to Ulzheimer, the card’s age can only be lost if it is deleted from your reports.

A closed account will stay on your records for approximately ten years (if it’s positive) or up to seven years (if it’s negative). The account will be included in determining the average age of your credit as long as it is listed on your reports.

The percent that FICO uses to factor in credit history as part of your overall credit score. Out of the five categories, payment history and outstanding amounts have the biggest impact. They account for %2035% and %2030%, respectively.

What CLOSING a Credit Card Did to My Credit Score…

FAQ

Do closed accounts with zero balances affect credit score?

Your credit report is a history of your accounts and payments. For that reason, even closed accounts with a $0 balance will remain on your credit report for a period of time. How long an account remains on your credit report after being closed is determined by whether the account is considered positive or negative.

How many points will my credit score drop if I close a credit card?

While there’s truth to the idea that closing a credit account can lower your score, the magnitude of the effect depends on various factors, such as how many other credit accounts you have and how old those accounts are. Sometimes the impact is minimal and your score drops just a few points.

Is it better to cancel unused credit cards or keep them?

Canceling a credit card will cause a direct hit to your credit score, so more often than not, you’ll want to keep the account open. Correctly managing an open, rarely-used account may require some extra attention, but the added effort will help your credit in the long run.

Does a credit card with no balance hurt your credit score?

Lenders want to know both how reliable and profitable you are. If you have a zero balance on credit accounts, you show you have paid back your borrowed money. A zero balance won’t harm or help your credit. To find out how we got here, we have to understand what credit is and the history of credit agencies.

What happens if you close a credit card account with zero balance?

By closing a credit card account with zero balance, you’re removing all of that card’s available balance from the ratio, in turn, increasing your utilization percentage. The higher your balance-to-limit ratio, the more it can hurt your credit. Your credit score also depends on the average age of your credit card accounts.

What happens if you close a credit card with a balance?

If you close a credit card with a balance, you will still be responsible for paying off the rest of your balance . The outstanding balance can still accrue interest, and you will no longer

Does closing a zero-balance credit card affect your credit score?

Learn about the potential trade-offs involved in closing a zero-balance credit card, as it may influence both your credit score and long-term financial health. This article contains general information and is not intended to provide information that is specific to American Express products and services.

Can a zero balance affect my credit score?

Unless you carry a zero balance on all your credit cards, this change leads to a higher credit utilization ratio which can negatively impact your credit score. This is especially important if the increase in your credit utilization will surpass 30% of your available credit. How many points will my credit score drop if I close a credit card?