Will canceling your credit card hurt your credit score?

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Our columnists are constantly fielding questions from our readers about credit issues. However, over the years, we've seen certain issues pop up more often than others. All this week, we're having each of our columnists field one of the most frequently asked questions for our users. Today, Credit Score Report's Jeremy M. Simon takes his turn..

Question: Will canceling a credit card hurt my credit?

Closing a credit card account may cause your credit score to fall, although as experts point out, it doesn't have to.

Canceling a credit card eliminates the line of credit associated with that account.  As a result, depending on your overall debt levels, a key ratio used to calculate your credit score may change. Known as the credit utilization ratio, it compares your credit card balances to the credit limits on those accounts. When you close an account, you may be pushed closer to your credit limits. That can make your score drop, and make you look like a risky borrower.

How much will it drop? It depends. "There are too many variables to provide a meaningful estimate of the possible point damage from closing a card," says Barry Paperno, consumer operations manager at myFICO.com. While damage estimates are difficult, FICO -- creator of the most commonly used scoring model -- leaves no doubt about its importance: Among the FICO score's components, credit utilization falls into the "amounts owed" category, which accounts for 30 percent of that score. That's the second biggest part of the equation.

Even so, the damage from an account closure is unlikely to be severe. The borrower's "credit scores can be hurt, although the point difference usually isn't large," says Rod Griffin, director of public education for credit bureau Experian. Additionally, the timing of any score decrease can vary. "The impact to your score from closing a card can be immediate, a few months or years later or not at all," Paperno says.

Impact on your score can vary
Whether or not you see your credit score fall depends on the accounts listed in your credit report. These are a few possible scenarios:

  • No debt on the closed account, but balances on other cards. If you pay off the card before canceling it, but carry balances on your other accounts, your overall credit utilization should increase and your credit score may fall. Say you have two open cards: each has a $5,000 limit, but one has a $2,500 balance while the other has a zero balance. That means you have $10,000 of available credit and $2,500 in debt, for a utilization ratio of 25 percent. "If you close the one in which you owe nothing, you remove $5,000 from the total available, which causes an increase in your utilization percentage to 50 percent," Paperno explains in an e-mail.
  • Balance still owed on closed account. In the recent past, Paperno says, cardholders typically didn't close an account before it had been paid off. "Yet these days, more and more consumers who have been notified of terms changes that include new annual fees, lower limits or finance charge increases, are closing these accounts to opt out of these changes," Paperno says. "What many people don't know is that if you close a credit card in which you still owe a balance, it will continue to be included in your credit utilization until the balance reaches zero." When that card is finally paid off, its line of credit will be removed from your total available credit. "So, in this case, closing a card won't have any immediate impact on your score, but once the balance is paid off, it could," Paperno says.
  • No balances on any cards. If your credit report shows no account balances, your credit utilization won't change when a card is canceled. In such a case, "you have a credit utilization percentage of zero percent. Thus, reducing your available credit in this instance will not change this percentage from zero percent and your score can remain unaffected," Paperno says. That's a good reason not to carry balances when you plan to close an account.

It is worth noting, however, that paying off your card balances every month doesn't guarantee that your credit report will show zero debt. That's because banks often report the most recent statement balance on your account, whether or not it has already been paid in full, to the credit bureaus.

Credit Score Report
Reporter Jeremy M. Simon
Jeremy M. Simon covers credit scoring and other issues as a staff reporter for CreditCards.com.

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Similarly, the credit lines associated with a closed account may not immediately come off your credit history. That could also mean a delay before your credit score reflects the change. "I would recommend that a consumer allow 30 days for the account status to be updated with the credit reporting companies. That will ensure the lender has time to update its records and to subsequently report the account closure to the national credit reporting companies," Griffin says. (Alternately, that update could happen in just a few days if the account is closed shortly before the card issuer updates the bureaus, he says.)

You could be waiting for much longer for those closed accounts to come off your credit history entirely. That's because your credit report includes both open and closed accounts, as well as notations about those accounts' payment histories. "For example, the account status might say, 'closed, never late' or 'closed, was 30 days late,'" Griffin says. He notes that closed accounts that were always paid on time remain on your credit report for 10 years from the date of closure, while accounts that were paid late remain on your report for seven years from the original delinquency date. "The positive information is kept longer than the negative information, which helps you re-establish a positive credit history," he says.

How to minimize the impact
To ensure that your closed account doesn't have much -- if any -- impact on your credit score, follow several guidelines:

  • Pay off your balances. A utilization rate of zero doesn't change when you close an account, so try and pay off all your debts before canceling a card.
  • Request higher credit limits. You'll be losing one line of credit when your account is closed, so call your other card issuers and request they increase your limits. If you've been a good customer, your request is more likely to be granted. But beware the possibility that the resulting account review could also leave you with less favorable terms.
  • Look over your credit reports. These reports will show where you've gone wrong in the past -- and how you can be a better borrower in the future. If you spot any damaging errors on your reports, be sure to dispute them so that they no longer hurt your credit.
  • Remain responsible. Since any scoring damage is likely to be minimal, offset that decline by following the most important steps to achieving good credit: Continue to make on-time payments, keep debt levels as low as possible and take on new debt only when necessary.

You may be thinking of closing an account that has no negative items associated with it. In that case, from a scoring perspective, the best choice may be to keep the account open, thus ensuring its positive history continues to benefit your credit score indefinitely. Remember: The age of an account factors into credit scoring, with old accounts considered to be better.

Of course, if you still want to close an account (perhaps due to an annual fee or to prevent its use by identity thieves), be sure to contact the bank and let them know you would like to have the card canceled. Shredding or cutting up your plastic has no impact on the account status -- it just ruins the card. You may also want to send a letter reiterating that you want the account closed. Then, you wait. "It's a good idea to check your credit report a month or two after requesting that the account be closed to ensure it has been reported correctly," Griffin says. Make sure the account is listed as closed at the request of the consumer rather than by the credit grantor. "If the account doesn't show that it is closed, you can dispute the status and your report should be updated to show the account has been closed," Griffin says. 

See related: How to cancel a credit card, FICO reveals how common credit mistakes affect scores, The components that make up a FICO credit score, Improving a great credit score comes down to timing, Poll: 2 out of 5 credit cardholders report getting whacked, Decade-old credit mistakes shouldn't appear on your report

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Updated: 10-16-2018