Does Closing a Credit Card Hurt Your Credit Score?

Because canceling a credit card can hurt your score, it’s smart to know what the potential impacts might be before making any moves.

The potential harm to your credit score doesn't mean you should never close a card, but it does mean you should think strategically and choose carefully.

How does closing a card affect your score?

When you close a card, especially one with a high credit limit, you are subtracting its available credit from your total, causing your credit utilization to rise. Credit utilization is the amount of your credit limits you’re using at a given time and it’s one of the most important factors that affect your credit score.

Personal finance professionals recommend having a credit utilization ratio of 30% or less.

Here's an example: Say you have three credit cards, two with $5,000 limits and one with a $10,000 limit, for a total of $20,000. If your total balance across all three cards is $2,000, your overall credit utilization is 10%.

Canceling the card with the $10,000 limit cuts your overall credit limit in half and suddenly that $2,000 balance is 20% of your limits. This higher utilization will negatively affect your credit score.

The impact is likely to be greatest if you are relatively new to credit or have few credit accounts, which is a called a "thin file." Having a low score might make it harder to qualify for an apartment, a loan or another credit card.

» MORE: Five tips for lowering your credit utilization

Your card is old and you never use it. Should you close it?

An unused card can still play an important role in your credit file, especially if it has a high credit limit. That card's available credit keeps your overall usage lower, which is a benefit to your score.

Some might worry that closing an older card will hurt their credit score because it will shorten the cardholder’s credit history or “credit age.” But, that’s a common misunderstanding.

“You don’t lose the value of the age of the card simply because you close it,” says John Ulzheimer, a credit expert and former FICO and Equifax employee. “In fact, accounts continue to age even when they’ve been closed.”

An account closed in good standing — meaning the balance is paid in full before the account is closed — will stay on a credit report for up to 10 years and will still be included in score calculations.

When should I close a credit card?

High annual fees or poor customer service

Not all credit cards are a great match, and there are some valid reasons for wanting to close your account. For example, If the card carries an annual fee you don’t think is worth it, you might want to cancel or ask for a card without fees. You also might want to close a card if customer service is consistently bad.

You don’t use the card and it has a low credit limit

Just because a card in your wallet isn’t as active as it once was isn’t cause to close it. Find out if it has a small credit limit and, if so, you may see little or no effect. But if it has a large credit limit, closing that card could have a big effect on your score because you’re lowering your total available credit.

You've graduated to a permanent card

Some cards aren't meant to be kept forever. Secured cards, for example, are like credit-card training wheels. Once you’ve shown you consistently pay on time, some issuers will allow you to “graduate” to an unsecured card with better terms. But if the issuer doesn't offer cards that are more desirable, canceling may be a smart option.

Divorce or separation from a spouse

Sometimes life events make canceling a credit card the best choice. If you are getting a divorce or separating from a spouse, disentangling your finances might be one of the first steps you take. When it comes to credit cards, this means canceling joint credit cards or removing yourself or your spouse as authorized users to protect yourself from unauthorized spending.

»NEXT: How to protect your credit during a divorce

You have a store credit card, but you no longer shop there

Retailer credit cards tend to have relatively low credit limits, which means even modest use can lead to high credit utilization. If you no longer shop at that particular retailer though, it might be worth closing that account.

Alternatives to canceling a credit card

Before initiating the credit card cancellation process, there are a few steps you can take to remedy the issues that are causing trouble:

Call and ask for better terms

If you are canceling because of fees, you could consider calling the issuer and asking if it has cards you would qualify for that are fee-free. You might be able to switch to another card from the same issuer and keep your payment history.

The same goes for cards that are no longer a good fit. Maybe you wanted an interest-free period when you opened a card, and now you would rather have a travel rewards card. If the issuer offers one you qualify for, you may be in luck.

Build your score and then switch cards

If you don't qualify to switch to something with better terms right now, you could keep the current card active and paid off every month to help build your credit score. Moving up to a higher score could eventually make you eligible for a new credit card that offers rewards and specific perks.

» NEXT: Find the best credit card for you

Use the card for a small, recurring charge

Keep the card open, and put a small recurring charge on it to keep the issuer from closing it due to inactivity. Consider using autopay or calendar reminders so you don’t miss a payment and hurt your score.

How to close a credit card

If you’ve decided that canceling is the best option, take these steps to make sure you’re doing it in a way that won’t harm your finances:

• Note your automatic payments: Go through your last few statements and highlight which charges are the result of automated payments. Be sure to switch each of those charges to another credit card so future charges aren't declined, perhaps costing you a late fee.

• Pay your balance: Most credit card issuers won’t let you close your account until your balance — including pending charges — is paid in full. If you have a high balance, you might need to make a plan to pay the debt off over time. If an issuer does let you cancel your card before paying off your balance, you are still responsible for those charges.

• Redeem your rewards: All unused points will probably disappear when you close your account, so don’t forget to redeem the rewards you earned over the life of your account. Some cards offer a “pay yourself back” feature, which you can put toward clearing out your statement balance.