In the realm of personal finance, credit scores hold immense power influencing everything from loan approvals to insurance premiums. Understanding how to manage your credit score effectively is crucial for financial well-being. One common question that arises is: how much does your credit score go down when you cancel a credit card?
This seemingly simple question has a complex answer as the impact on your score depends on various factors. Let’s delve into the intricacies of credit card cancellation and its effect on your credit score drawing insights from reliable sources like NerdWallet and Investopedia.
The Credit Score Conundrum: Unpacking the Myths and Realities
Many believe that cancelling a credit card automatically leads to a significant credit score drop. While this might be true in certain scenarios it’s not always the case. Several factors play a crucial role in determining the actual impact including:
- Credit Utilization Ratio: This metric measures the percentage of your available credit that you’re currently using. Cancelling a card can increase your utilization ratio if you don’t simultaneously decrease your overall credit card debt. A higher utilization ratio can negatively impact your score.
- Credit History Length: The age of your credit accounts contributes to your credit score. Cancelling an older card can shorten your credit history, potentially lowering your score.
- Number of Open Accounts: Having a healthy mix of open credit accounts demonstrates responsible credit management. Cancelling a card can decrease the number of open accounts, potentially impacting your score.
The Bottom Line: When Cancelling Makes Sense
While cancelling a credit card can sometimes affect your credit score, it’s not always a bad idea. In certain situations, it might even be beneficial. Here are some scenarios where cancelling a card might be the right move:
- High Annual Fees: If you’re paying a hefty annual fee for a card you rarely use, cancelling it can save you money without significantly impacting your score, especially if you have other cards with low utilization.
- Temptation Trap: If you find yourself tempted to overspend on a particular card, cancelling it can help you curb unnecessary debt and improve your financial discipline.
- Joint Accounts: During a separation or divorce, closing joint credit card accounts is advisable to avoid potential financial liability.
The Art of Cancelling a Credit Card: A Step-by-Step Guide
If you’ve decided to cancel a credit card, follow these steps to minimize the impact on your credit score:
- Redeem Rewards: Before cancelling, use any accumulated rewards points or miles to maximize their value.
- Pay Off Balances: Ideally, aim to pay off all outstanding balances on the card you’re cancelling, and any other cards you have, to minimize credit utilization.
- Contact Your Card Issuer: Call your credit card issuer to confirm your balance and initiate the cancellation process.
- Follow Up in Writing: Send a certified letter to your card issuer requesting written confirmation of the cancellation and your $0 balance.
- Monitor Your Credit Reports: Regularly check your credit reports from all three bureaus (Experian, Equifax, and TransUnion) to ensure the account is accurately reported as closed and your balance is reflected as $0.
Dispelling the Myth: Credit History and Closed Accounts
Contrary to popular belief, closing a credit card doesn’t immediately remove it from your credit reports. As long as the account remains on your reports, its age contributes to your average credit history length. However, remember that negative information associated with the closed account, such as missed payments or delinquencies, can still impact your score for up to seven years.
The Takeaway: A Balanced Approach to Credit Card Management
While cancelling a credit card can sometimes affect your credit score, it’s not always a detrimental move. By understanding the factors involved and following the recommended steps, you can minimize the impact and make informed decisions about managing your credit cards. Remember, a healthy credit score requires a balanced approach, including responsible credit card usage, timely payments, and a diverse mix of open accounts.
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.
Understanding the Impact of Credit Utilization Ratio
Credit experts advise against closing credit cards, even when you’re not using them, for good reason. Beverly Harzog, a credit card expert and consumer finance analyst for U.S. Bank, states that canceling a credit card may lower rather than raise your score. S. News & World Report.
Closing a credit card can impact your credit utilization ratio, potentially dinging your credit score. Credit utilization measures how much of your total available credit is being used, based on your credit reports. The more available credit you use (per your reports), the worse the impact will be on your score.
Here’s a simple example of how closing a $0 balance credit card backfires:
- The first credit card has a $1,000 balance and a $1,000 limit.
- The second credit card has a $1,000 credit limit and a $0 balance.
- Your combined credit utilization on both cards is 2050% ( $1,000 total balances/20%C3%B7% $20 $2,000 in total limits/20= 2050% utilization).
- Shut down credit card number two, and your credit utilization will increase to 20100% ( $1,000 total balances/20%C3%B7%20 $1,000 total limits/20= 20100% utilization).
You should aim to pay your credit card balances in full every month. By doing this, you can avoid damaging your credit and potentially save a significant amount of money on interest.
Paying your balance in full is especially important before closing a credit card account. You can close a credit card without negatively affecting your credit score if all of your credit reports indicate $0 balances on your accounts.
The higher the credit utilization ratio, the more it can negatively impact your credit score. That’s why it is commonly recommended to keep the ratio below 30%.
What CLOSING a Credit Card Did to My Credit Score…
FAQ
How many points will my credit drop if I close a credit card?
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What opening or closing a credit card does to your VantageScore (utilization rate)
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Average score change, increased utilization rate
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Average score change, decreased utilization rate
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Card openers
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Down 19 points
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Up 7 points
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Card closers
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Down 10 points
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Up 14 points
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What happens if you cancel a credit card?
If the card you cancel has a credit limit of $3,000, your total credit available goes down to $7,000. With the same $2,000 in spending, your utilization ratio is now 29 percent. A higher ratio may hurt your credit score. The best scores usually have a ratio between .01-.10, meaning you’re using 10 percent or less of your available credit.
How much credit is available if I cancel a credit card?
For example, if the available credit for all your cards combined is $10,000 and you have a total of $2,000 in charges, your utilization ratio is 20 percent (2,000/10,000=.20). If the card you cancel has a credit limit of $3,000, your total credit available goes down to $7,000.
What happens if you cancel a credit card with a $10,000 Limit?
If your total balance across all three cards is $2,000, your overall credit utilization is 10%. Canceling the card with the $10,000 limit cuts your overall credit limit in half. Then, your $2,000 balance is 20% of your limits, and that higher utilization will affect your credit score.
Does closing a credit card hurt your credit score?
Canceling a credit card can hurt your score. It’s smart to have an idea of what closing the card would do to your credit score before you do it. Canceling your cards with the highest credit limits could potentially do the most damage.