Does Canceling Credit Cards Affect Your Credit Score?
Your credit score plays a major role in your ability to get loans or credit cards. If you’ve been refused credit in the past and you’re concerned your score may be too low, don’t fret. There may be ways to improve it.
However, canceling credit cards may not be the best approach to improve your rating. Instead, it helps to learn how credit works and what impacts your score. We’ll show you what can happen if you cancel your credit card, and what actions you can take to raise your score.
How Does Canceling Credit Cards Affect Your Credit Score?
When you cancel a credit card account, you reduce your total usable credit. Part of your credit score is determined by your credit utilization, or the ratio of your total credit balance compared to your credit limit on all accounts.
Since your credit utilization ratio makes up 30 percent of your score, closing an account can negatively affect your score a great deal, particularly if you carried a significant balance on other card accounts. Generally speaking, you want to keep your credit utilization ratio at 30 percent or less.
For example, let’s say you have two credit cards with a $5,000 credit limit on each card. You only use one credit card, so you decide to cancel one of them. The other card has a $2,000 balance.
Before you canceled one card, your credit utilization was right at 20 percent (2,000/10,000 x = .20), which is generally seen as a responsible usage ratio.
After canceling one of the cards, your credit utilization ratio jumped to 40 percent (2,000/5,000 = .40), which may signal to lenders that you’re using too much of your available credit. The higher your credit utilization ratio, the more it negatively impacts your score.
Canceling a credit card account can lower your score in another way. Fifteen percent of your credit score is calculated from the length of your credit history. That’s one of the reasons why, generally speaking, older Americans have higher credit scores than younger generations.1 Closing an account can lower the average age of all your credit accounts. If you closed your oldest credit account, it likely would have a bigger impact on your credit than a newer account. Similarly, if you closed an account and your credit history is short, it might be hard to secure a new credit line if you needed to borrow money in the future.
When Does it Make Sense to Keep Credit Card Accounts Open?
You shouldn’t necessarily cancel a credit card now if you think you may need to borrow money again in the near future. Applying for new credit, which creates a hard credit inquiry on your report, is another factor that can lower your score. Too many recent inquiries can send a signal that you’re at an increased credit risk or are experiencing financial distress.
Essentially, you should avoid opening and closing credit cards unnecessarily; it may make more sense to not close a credit card account if you’re concerned about the impact it can have on your credit score.
When Is it a Good Idea to Close a Credit Account?
Sometimes, it makes sense to close a credit card account. Your specific situation and credit card agreement will vary, so it’s a good idea to research your options before making a final decision. Here are some scenarios in which you may want to close your account:
- If your APR and/or annual fee are too high
- If you’re tempted to overspend
- If you have uncontrolled debt
How Can You Raise Your Credit Score?
Overall, the biggest factor in determining your credit score is how you manage your repayments. You should always try to make payments on time, and avoid falling behind on your debt. The second-biggest impact on your score is your credit utilization, so you should also try not to use more than you can afford. Your credit score is based on your history of borrowing and repaying money, so significant changes will take time.
Regardless of the type of credit you use, it’s a good idea to aim for as high a score as possible. A good credit score can lead to a lifetime of benefits, like reduced interest rates, lower fees and improved financial opportunities.
1Lembo Stolba, S. (2019). What Is the Average Credit Score in the U.S.?