A wallet or purse that’s overcrowded with too many credit cards can be enough to convince you that it’s time to leave a few cards that are rarely used home. If you’re not using a card at all, you may be thinking of canceling it.
Cancelling a credit card if you rarely use it or have paid off the balance can feel good. It can give you a sense of accomplishment while lightening your wallet and giving you one less way to spend.
But doing that can also cause your credit score to drop — though that shouldn’t be a concern if you can’t control your spending with a credit card. But if you want to keep your credit score where it is or improve it, then holding on to a credit card is a good option.
And don’t think that getting rid of a credit card will help your credit score immediately. Cancelling a credit card doesn’t remove the account from your credit report. Your payment history and credit history length will stay on your credit report for 10 years. That can be a good thing — it shows your credit history length, which accounts for 15 percent of a credit score.
Credit utilization could fall
Where it will hurt will be in your credit utilization, which is the percentage of your available credit used. The lower your credit utilization, the more it will increase your credit score. About 30 percent of a credit score comes from credit utilization.
By cancelling a card, you’ll have less available credit to spend. If you spend the same amount on your credit cards, your credit utilization ratio will rise because you have less available credit.
Here’s an example: Suppose you have three credit cards with $10,000 each in available credit, for a total of $30,000. You use about $10,000 of that credit each month, charging about $3,333 per card. That gives you a 30 percent credit utilization ratio, which is about as high as you want it to go for credit scoring purposes.
Drop one of those cards and you now have $20,000 in available credit, but are still spending $10,000 per month. Your credit utilization ratio has just increased to 50 percent, which is extremely high. Unless you cut your spending, the ratio will remain high.
You can improve your credit utilization ratio by paying off most of your credit card balance, and by using your credit card less. There are also other options.
Options to closing a credit card
Since credit utilization is such a big factor in a credit score, it can make sense to not close a credit card and use other options.
In addition to using a card less or not at all, you can call your credit card company and ask it to waive the annual fee. The company’s retention department is likely interested in keeping you as a customer instead of cancelling your card because it’s cheaper to retain a good customer than to try to acquire new ones. They may also offer you other incentives, such as bonus points.
Another option is to switch the card you’re thinking of closing to a no-annual-fee card. You’ll have the same credit limit, account number and the account’s age won’t change on your credit report. Along with no longer paying an annual fee, you’ll likely lose the rewards points program that annual fee cards usually offer — which is fine if you’re not going to use the card anyway.
Switching to a no-annual-fee card — instead of closing a rewards card with a fee and then opening a no-fee card — will allow you to avoid a hard pull on your credit account. A hard pull, or hard inquiry, happens when a lender such as a credit card issuer checks your credit when you apply for a card. Too many inquiries can have a small impact on your credit score.
A simple alternative to closing a credit card is to leave it at home and not use it much. Store it somewhere safe and use it a few times a year to avoid and possible cancellation for inactivity. A small recurring charge should be enough to keep it active and avoid automatic cancellation for not being used. It may not be necessary, and you can ask your credit card about it. You may also want to set up autopay so that the bill for the rarely used card isn’t forgotten.
Closing a credit card won’t be the start of your financial downfall. But it does have consequences and could hurt your credit score for awhile. That may be worth it if an extra credit card is too tempting to avoid using.