What is the downside of cancelling a credit card?

The Unseen Cost of Credit Card Closure

Closing a credit card, even a seemingly insignificant one, can have a surprisingly detrimental effect on your credit score, particularly if it’s a card you’ve held for some time. While the impact might not be immediately apparent or seem drastically large, the subtle erosion of your credit history can have long-lasting consequences, particularly for those actively working to improve their credit standing.

The fundamental issue is that your credit score is, in part, a reflection of your credit utilization history. Each credit card, particularly those carrying a significant credit line and a lengthy history, contributes to a more comprehensive picture of your creditworthiness. Closing one of these cards reduces that overall picture, potentially impacting your credit score.

While the exact decrease in points may not be substantial for everyone, the effect can be more pronounced for individuals who are trying to improve their credit score. Small adjustments can be critical, as the difference between a “fair” and “good” credit rating, often the key to securing favorable loan terms or renting an apartment, can hinge on a mere handful of points. Removing a card, especially one with a substantial credit limit and lengthy history of responsible use, might, even inadvertently, place a slight roadblock on those efforts.

Furthermore, closing a card can unintentionally alter your credit mix. If the closure reduces the variety of credit accounts you hold, this could also subtly affect your score. A balanced mix of credit accounts (different types of credit such as credit cards, installment loans, and mortgages) paints a more comprehensive picture of your borrowing habits and responsibility.

This is not to say that closing a credit card is always a negative choice. There may be justifiable reasons, such as wanting to consolidate debt or address excessive spending. However, understanding the potential downside – especially the impact on credit scores, especially for those striving for improvements – is crucial before making a decision to close an account. Carefully weighing the pros and cons, and potentially seeking advice from a financial advisor, is essential to make an informed and beneficial choice.