Does Closing a Credit Card Hurt Your Credit Score? Here’s What You Need to Know

Does it hurt your credit to close a credit card? While the answer is generally yes, it’s actually more complicated than that.

While closing a credit card can impact your credit score, the effect isn’t always the same for everyone. You should make the decision based on a comprehensive analysis of your financial situation. Do you tend to overspend when using credit cards? Are you paying high annual fees on a card you’re not utilizing? Consider the big picture when deciding whether or not to close a credit card with the following information.

How Closing a Credit Card Affects Your Credit Score

Why does it hurt your credit to close a credit card? Here are a few factors that impact credit scores.

• Credit utilization: Closing a card reduces your total available credit, which in turn increases your credit utilization ratio. This means the amount of credit you use is a greater percentage of your total available credit, which can lower your score.
• Credit age: The age of your credit history can have a big impact on your credit score. Longer credit histories contribute to higher scores. Closing an older card can reduce the average age of your credit accounts, which may lower your score.
• Credit mix: Having a variety of different credit types can help you maintain a higher score. Closing one account can reduce your overall credit mix, ultimately damaging your score.
• Payment history: Closing an account generally won’t impact your payment history as long as your account is in good standing at the time of closing. However, if you close an account with an outstanding balance, you may see a negative impact on your payment history, which can harm your credit score.

Closing business credit cards can have the same effect. Business entities have credit scores just like private individuals, which help investors and banks evaluate the risk of lending to them. In order to maintain good business credit, you'll also need to be careful when closing accounts.

When It Might Make Sense to Close a Credit Card

Avoiding High Annual Fees and Unused Rewards Programs

If your credit card comes with high annual fees, closing the account may actually save you money in the long run. This is especially true if you’re closing an unused credit card or if you aren't benefiting from the perks and rewards.

To get the most out of your credit card, take a look at our list of the best credit cards with low fees and high rewards.

Managing Overspending and Improving Financial Habits

For users with a substantial amount of credit card debt, it may be beneficial to close a credit card account in order to manage excessive spending, reduce overall credit card usage, and get back on track financially.

How To Close a Credit Card Without Hurting Your Score

Paying Off Remaining Balances Before Closing the Account

Make sure you pay off your card completely before closing the account. If you close a credit card with a balance, you’re still responsible for that debt, and you’ll continue to accrue interest on the remaining balance.

Because closing a card reduces your available credit, having a balance without the available credit can have a negative impact on your total credit utilization ratio. Paying off the card you want to close and paying down any balances you have on other credit cards can help mitigate the impact on your credit score.

Keeping the Card Open for Small Purchases Instead of Closing

If you’re able to use the card responsibly and you’re not paying high annual fees, it’s usually better for your credit to keep the card open for small purchases rather than closing it.

When used responsibly, a greater number of open accounts looks good on credit reports. It also increases your total credit limit, which can improve your utilization ratio.

Managing Credit Wisely: Keep or Close Your Card?

So does it hurt your credit to close a card? While closing a credit account can have a negative impact on your credit score, there are ways to minimize the effect with diligence and careful planning. But in some situations, closing a card may be the right decision, depending on your spending habits and overall financial situation.

At Money Atlas, our goal is to empower you with financial education, including comprehensive investment guides, credit card reviews, and more. We can help you take charge of your financial future and make informed decisions.