When starting your personal finance repair journey you may be tempted to close credit card accounts, especially if the credit card has a negative impact on it, such as a late payment.
Canceling 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, getting rid of credit card debt, and giving you one less way to spend.
Even the best credit cards with all the perks can get you in a bind if you’re not disciplined.
Before I get going, I want to disclose that all the editorial content on this page are my opinions and are not endorsed by any particular company.
Rates and other information may vary based on your eligibility and credit score.
Should I Cancel My Credit Cards?
Generally, canceling your credit cards is a bad idea. It’s actually better for your credit score, in most cases, if you keep the account open. Why is that the right way?
A big part of your credit score depends on the length of your credit history. 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.
After all, a closed account 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 — your oldest account shows your credit history length despite being an unused credit card, which accounts for 15 percent of a credit score.
The three credit bureaus (Experian, Equifax, and Transunion) use different scoring models, including FICO, to gather the information and data to compile your score.
They calculate the amount of available credit with your balance to compute the credit utilization rate. A lower rate is better for your score.
If you are only able to pay minimum payments and maintain a balance, your score could suffer.
Before you cancel your credit card, try calling the issuer and asking them to waive their annual fee or downgrade the account or total available credit/amount of credit.
Closing Credit Cards Can Hurt Your Credit Score
By keeping your credit cards open, you’re adding credit history to your credit profile, even if it has negative marks. It’s much better to try and remove late payments from your credit cards than to close them.
I made this mistake when I started my own credit repair journey, actually.
Closing credit card accounts seemed logical to me at the time. I thought, “Ok, I have a bunch of credit cards, I have paid them off, and I don’t want to be tempted to use them again so I better close these accounts.”
I also said to myself, “Hey, this will improve my credit score too! The magic FICO credit score generator will see that I am acting responsibly by closing credit card accounts after I paid them off!”
This couldn’t have been farther from the truth.
Three months after I closed 3 out of 4 of my credit cards, my credit score dropped.
Why Does Canceling a Credit Card Affect Your Credit Score?
Your credit score is largely based on how well you manage open credit accounts. Once you close the account, the average age of accounts in your credit report will lessen.
If the account is closed, there is nothing to go off of except the account history before you closed the account (which is probably bad if you closed the account).
An excellent credit score reflects that the individual has had long term, well-managed credit accounts.
Also, while it is true that too many open credit card (revolving) accounts can hurt your credit score, the key is to shy away from opening too many accounts, not closing the accounts.
Bottom Line: Never close an open credit card account –it can hurt your credit score.
Credit Utilization Falls if You Cancel
Closing credit cards will hurt 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 canceling 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.
Credit Utilization Ratio Explained
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.
Alternatives to Closing a Credit Card Account
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 cardholder 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.
Change to No-Annual-Fee
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 a high 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.
Limit Credit Card Use & AutoPay
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 automatic payments 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 a while. That may be worth it if an extra credit card is too tempting to avoid using.
Should I Re-Open My Credit Card Accounts?
Another technique you can try if you have already closed a credit card account is to contact the creditor and ask if they will consider reopening the account.
You can be certain that they will pull your credit report, so this usually only works if you have shown some improvement recently.
You can also follow the steps I outline in my post 5 Amazingly Simple Techniques to Optimize Your Credit Score to make sure your score is optimized before you ask them to reopen the account.
Here is how I got Capital One to reopen my account after I paid off the balance and closed the account:
First I applied for and received a secured credit card to rebuild my credit (Open Sky Secured Credit Card is the card I got in case you’re wondering). I kept up on the payments for one year. Try to keep a few months with a zero balance as well to show you have control overspending.
After the one year was up, I called their customer support and asked if they would “kindly consider reopening my account based on the recent steps I have taken to improve my credit score and the accounts I have in good standing as of right now.”
They checked my credit report and a few weeks later I received a Capital One new credit card with a $500 limit.
Important Things to Remember About Cancelling Credit Cards
- Never close credit card accounts that are in good standing.
- Avoid bad credit by not opening too many new card accounts. (2 or 3 credit cards is plenty)
- If you can’t control your spending it’s better to throw away the credit card than to close the account or search for a lower interest rate balance transfer to help control your credit debt.
- Attempt to reopen closed credit card accounts by contacting the creditor after you have proved that you can be trusted.
- If the card you have is obsolete, try canceling that card and opening a rewards credit card such as American Express to capitalize on the perks for traveling.
- To cancel a credit card, contact the issuer and give your name, phone number, credit account number, and address and state you would like the card to be closed “at the consumer’s request.”