Does Closing a Credit Card Hurt Your Credit

People close credit cards for all kinds of reasons - an annual fee they do not want to pay, a card they never use, or just wanting to simplify. Before you do, it helps to understand what actually changes on your credit report and whether it is worth it.

What Actually Happens to Your Score

When you close a credit card, two things happen to your credit profile right away.

First, your total available credit drops. That raises your credit utilization ratio across all your cards. If you have $15,000 in total limits and close a card with a $5,000 limit, you now have $10,000 available. If you were carrying $3,000 in balances, your utilization jumps from 20% to 30% overnight - without spending a single dollar.

Second, the card account eventually stops contributing to your average account age. However, this is not instant. A closed account stays on your credit report for up to 10 years. During that time it still counts toward your average age. The damage from closing an old account is slow - it shows up gradually as the account eventually falls off.

When Closing a Card Hurts Most

The math is simple: if the card you are closing represents a big chunk of your total available credit, closing it will visibly raise your utilization. If it is one of many cards and the limit is small, the change is barely noticeable.

What to Do With Annual-Fee Cards

If a card charges a $95 annual fee and you are not getting $95 in value from rewards or benefits, it usually makes sense to close it. Before you do, call the issuer and ask if they can waive the fee or product-change you to a no-fee version of the same card. Many issuers will do a product change, which keeps your account open and your limit intact - no score impact at all.

What to Do With No-Fee Cards You Never Use

This is where most people go wrong. A no-fee card sitting in a drawer costs you nothing and helps your score in two ways: it keeps your available credit high (lowering utilization) and it keeps aging (building account history). The only reason to close a no-fee card is fraud risk - if the card number has been compromised or if you genuinely cannot keep track of it.

Check Before You Close

Before closing any card, look at what percentage of your total available credit that card represents. If it is more than 20% of your total limits, pay down your other balances first so the utilization jump is smaller. Under FICO scoring, the utilization hit from closing a card is immediate, but it is also reversible - pay balances down and the score comes back.

When Closing Is Worth It and When It Is Not

Close the card if: you are paying an annual fee that is not justified, the card has a high interest rate and you occasionally carry balances, or the card is attached to a service you no longer use. Keep the card if: it is fee-free, it holds a large portion of your available credit, or it is one of your oldest accounts. In most cases, a no-fee card you never touch is more valuable open than closed.