Does Closing a Credit Card Hurt Your Credit Score?
Thinking about cancelling one of your credit cards?
If you pay an annual fee for a card you don't use, or if you’re struggling to use the card responsibly, cancelling may be the right decision. However, you need to be aware of how closing a credit card could affect your credit score.
Your credit score is a number assigned to you that indicates your ability to repay a loan to lenders (banks and other financial institutions). Since it determines if you will qualify for credit, and what interest rate you’ll pay on your credit, it’s important to helping you reach your financial goals.
Before making a call on cancelling your card, let’s explore the pros and cons and learn how to minimize the impact on your credit score.
How does closing a credit card affect your credit scores?
Closing a credit card can affect two critical factors that credit bureaus use to calculate your credit scores: your credit history (how long you’ve had credit) and your credit utilization ratio (the amount of available credit you’re using across all your accounts).
Credit history is based on the average age of your credit accounts — credit cards, student loans, car loans, mortgages, etc. The older your credit history, the better, as it acts as living proof to credit bureaus (and by extension lenders) that you pay your debts as agreed to and on time.
When you cancel a credit card, you can shorten the length of your credit history and increase your credit utilization ratio all at one time, thereby impacting your credit rating.
What exactly is credit utilization ratio?
By closing a credit card, you decrease the total amount of credit available to you and increase your credit utilization ratio. For example, say you have two credit cards: Card No. 1 has a $1,000 credit limit and a $0 balance. Card No. 2 has a $1,000 credit limit and a $1,000 balance.
In this scenario, your credit utilization ratio is 50%, because your total balance across both cards is half the available credit. But by closing card No. 1, your credit utilization ratio would spike to 100% because you would have a $1,000 total balance and a $1,000 credit limit.
Lenders typically prefer that you use no more than 30% of the total revolving credit available to you. Since carrying more debt may suggest you are having trouble repaying what you borrow, having a high credit utilization score could negatively impact your credit.
How much does closing a credit card hurt your credit?
After you close a card, the actual change to your credit scores will be unique to your circumstances. But it should not significantly impact your credit score—especially if you demonstrate responsible credit use with the accounts you keep open. Even if your credit score drops after closing a credit card, it will typically recover in the long term if you continue to make your payments on time.
One of the many benefits you enjoy as a Capital One customer is account alerts that help you stay on top of purchases and use credit responsibly.
Why should you consider keeping your credit card open?
If you use your credit card responsibly and it has low or no fees, it may benefit you to keep the account open as it can help you maintain a lower credit utilization ratio. If you have a card like the Capital One Aspire Travel® Platinum Mastercard®, it may also be worth holding on to because you can redeem rewards for a much-deserved vacation or staycation.
Additionally, your credit scores can benefit from having more than one credit type – from car loans to personal lines of credit. If your credit card is your only form of revolving credit, you may want to keep it open to diversify your active credit. It may also be smart to keep your credit card open if you plan to take out a loan for a house or a car as it could help strengthen your loan application.
How can you close a credit card with minimal impact on your credit score?
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Pay down your balance first. Keep your credit utilization under control by ensuring your credit card balance is paid in full and there are no outstanding balances before you shut it down.
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Double-check your payoff amount. In some cases, the payoff amount for your card may be more than just the statement balance because of fees and interest. Be sure you check with your credit card issuer to confirm what you owe.
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Get confirmation of your cancellation. With some credit card companies, you can simply sign in to your account to close it. Or you may be able to call your card issuer to make the request. Either way, consider getting confirmation in writing so you have a permanent record in case anything is called into question.
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Check your credit reports. After closing your card, check your credit score with Credit Keeper from Capital One. It’s quick, secure and free, and checking won’t hurt your credit score. You don’t even need a Capital One credit card to use it.
Whether you decide to cancel your credit card or hold on to it and keep your credit on ice, there is no right or wrong answer. As long as you’re aware of the potential impact on your overall credit score, you can make the best possible decision for you and your unique life circumstances.
* If Quick Check pre-approves a card, you can be sure we’ll approve your application, except in limited circumstances. Some of the reasons we may not approve your application, among others, include:
a. There’s been a change in your credit file information, personal information or financial status from the time you receive your Quick Check results to the time you apply for one of our credit cards.
b. You’re not at least the age of majority in the province or territory you live in.
c. Your application is flagged for fraud prevention.
d. You have an existing Capital One account.
e. You’ve applied for a Capital One account in the last 30 days or had an account with us that was not in good standing in the last year. In good standing means not past due, over limit, fraudulent, restricted, or part of a consumer credit counselling program or bankruptcy.
In some cases, we may not be able to open an account for you even though your application was approved. This can happen if we’re unable to verify your identity, or you don’t provide the required security funds if you’re approved for a Secured Mastercard®.