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Lifestyles, spending habits, living arrangements and financial situations can all change rapidly. These changes can make you question the benefits of holding certain credit cards any longer.
The temptation to close a credit card you no longer use, or one you pay an annual fee for, can be high.
Yet, closing a credit card is not a decision you should take lightly. In fact, in most cases, holding on to that credit card is your best bet.
That said, as with every rule, there are exceptions.
Let’s look at the risks involved in closing a credit card, as well as situations where you should cancel your card.
The Risks of Canceling a Credit Card
The main risk of closing your credit card is experiencing a hit to your credit score. This comes with two primary consequences.
Firstly, if you’re applying for a new credit card–or even more pressing, a mortgage or loan––canceling an existing credit card is not a smart move.
The potential hit to your credit score could cost you your new card application, or increase the loan rate on your mortgage. So if you’re set on canceling your credit card, ensure you do it after finishing any applications for new lines of credit.
Secondly, if you lack credit history, or if your credit score is already below average, canceling an existing card will make future credit card applications even more difficult.
In most cases, holding on to that card will be more beneficial in the long run, as it will increase the overall age of your accounts, boosting your credit score.
Let’s now look at the mechanism behind why your credit score can experience a hit when you close an existing credit card.
Understanding the Anatomy of Your Credit Score
Your credit score is a measurement of your creditworthiness–in other words, your suitability for receiving financial credit, based on the likelihood of you paying it back.
It’s expressed numerically, ranging between 300 to 850 for FICO® scores.
Three major credit bureaus exist in the United States today: Equifax, Experian and TransUnion. Your credit score may be calculated using either the FICO model or the VantageScore® model, which gives certain factors different weightings when assessing your credit profile.
The higher your score, the more creditworthy you are, meaning you’re more likely to be approved for premium credit cards, higher credit limits and loans.
Your credit profile determines your credit score. For FICO, your credit profile is made up of the following components:
- Payment history
- Credit mix
- Amounts owed
- Length of credit history
- New credit
For VantageScore, your credit score is calculated a little differently, according to the following factors:
- Payment history
- Depth of credit
- Credit utilization
- Recent credit
- Balances
- Available credit
When you cancel a credit card, it’s your “Length of credit history,” “Credit utilization” and “Depth of credit” category weightings that are most affected.
Credit Utilization Ratio Increase
One of the reasons you can experience a short-term hit to your credit score after canceling a card is due to your credit utilization ratio increasing.
Your credit utilization ratio simply compares your current credit balance to your total aggregate credit limit.
It’s calculated as follows:
Credit Utilization Ratio = Credit Card Balance ÷ Credit Limit × 100
Credit utilization accounts for 30% of your FICO score and 20% of your VantageScore.
Let’s say your total credit limit across all cards adds up to $10,000 and you have a current balance of $3,000. This would mean your credit utilization ratio stands at 30%–the recommended maximum for keeping a good credit score, incidentally.
Now, let’s say you decide to cancel one of your cards, bringing your total available credit limit down to $7,000. With the same balance of $3,000, this would automatically increase your credit utilization ratio to 42.9%.
The amount of debt you owe remains the same, but your credit utilization ratio will spike nevertheless, affecting your credit score.
Drop in the Age of Your Accounts
The second consequence of canceling a credit card is the reduction in the overall age of your accounts.
As already mentioned, the length of credit history is a key element in the calculation of your credit score. For FICO it accounts for 15% of your score, and for VantageScore, it accounts for approximately 20% (although this includes credit mix as well).
If you cancel a long-standing card, the reduction in the total age of your accounts can cause a hit to your credit score.
When you cancel a card, FICO still counts it on your credit report for up to 10 years, if it is positive, and for up to seven years if it is negative. For this reason, the drop to your FICO score won’t be immediate, but will rather occur after this period.
The VantageScore model, on the other hand, doesn’t always consider closed accounts on your credit report, meaning the hit to your VantageScore could occur earlier compared to your FICO score.
Consequently, the older your credit card, the more you should consider holding on to it. This is all the more true if you have few other credit card accounts open, as the hit to your score will be even greater.
When Should I Cancel My Credit Card?
Firstly, you should always keep a credit card for at least a year before canceling it. This gives you time to evaluate the benefits and come to a better-informed decision on whether it makes sense to continue holding it.
However, if after a year the annual fee outweighs the return value – and no foreseeable events will change this – it might be time to cancel your card.
Lifestyles and spending habits change. This can cause certain cards with specific bonus categories and perks to lose their value to you.
For example, the Southwest Rapids Rewards® Priority card earns Rapid Rewards points on a variety of bonus category purchases. It also gives you a boost of 10,000 Companion Pass qualifying points every year, as well as 7,500 anniversary points per year – all for an annual fee of $75.
Perhaps when your travel goals revolved around coast-to-coast travel within the United States, this card served your needs and gave you an excellent return value. Yet, now that you want to benefit from point-funded international travel to Europe, Africa and further afield – and you’re no longer interested in domestic travel – the card’s benefits no longer offset the annual fee. If Chase isn’t willing to give you a retention offer, such as a fee waiver, then it may be worth canceling the card.
Similarly, certain changes in living arrangements–such as a divorce–may require you to separate your finances. In this case, despite the potential hit to your credit score, canceling a certain credit card or removing an authorized user might be necessary.
How To Close a Credit Card
Before you cancel a card, consider the monetary value of any cardholder perks and whether or not you can still benefit from them. For example, if a card comes with airport lounge access that you still benefit from when you travel, then canceling the card might not be the smartest move.
Remember that as long as the monetary value of the perks you utilize offsets the annual fee, the card is worth holding onto – particularly the older the card is.
If the benefits don’t outweigh the perks, and it costs you money to continue holding the card, consider contacting your card issuer and asking for a retention offer or product change to a $0 annual fee card. In some cases, your card issuer may be able to give you an annual fee waiver or reduction or transfer you to the no-annual-fee version of the same card.
If none of this is possible, or if the fee reduction still costs you more than the return value, then it’s time to cancel your card.
The first step to canceling your card is paying off your balance in full. Once you’ve done this, double-check with your card issuer that your balance is indeed $0. If possible, it’s a smart move to pay off all of your balances across all of your credit cards. By doing this, your credit utilization ratio will remain below 30% when you cancel your card, mitigating the hit to your credit score.
Generally, it’s best never to carry a balance to maximize your return on credit cards.
Then, proceed by canceling any recurring payments or subscription charges on your card. Forgetting to do this could cost you massively in late penalty fees if you unknowingly carry a balance due to a recurring charge.
Lastly, ensure that you make use of any remaining points you’ve accumulated.
Whether that means redeeming them for cash back, statement credits, travel or transferring them to a partner organization, always try to use your points. Letting points go to waste reduces your ability to offset any previous annual fees and card spending, costing you more than you receive in return.
Once you’ve completed these steps, the final step is to contact your card issuer to cancel your card and close the account. Be sure to check your credit reports after this to ensure the account is closed and the balance is paid.
Final Thoughts
If you can avoid canceling a credit card, it’s advisable to do so.
Canceling a card will likely cause a hit to your credit score, due to the spike in your credit utilization ratio and as it shortens the overall age of your accounts. The fewer lines of credit you have open, the older the card is that you cancel, and the higher your other card balances are, the greater the impact will be on your credit score.
However, there are legitimate reasons to cancel a credit card. Namely, when the annual fee costs you more than the return value, or when events such as a divorce make separation of finances necessary.
Before closing a card, call the credit card company to see if they can offer you a retention offer such as a waived or reduced fee or ask if you can downgrade to a $0-annual-fee card in the same product family.
In the case that you must close a card, just ensure you use any accumulated points, pay off all your balances, cancel recurring charges and double-check your credit report to be sure that the account is indeed closed.
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