How much will my credit score drop if I cancel a card?

Closing a Credit Card: Will It Tank My Credit Score? The Truth About Cancellation

The world of credit scores can feel like a precarious balancing act. We’re constantly told to build good credit, use credit responsibly, and avoid mistakes that could send our scores plummeting. So, it’s natural to worry when considering a seemingly drastic step like closing a credit card. Will cancelling a card send your credit score into a nosedive?

The good news is, closing a credit card doesn’t automatically guarantee a significant drop in your credit score. The actual impact depends on several factors. Understanding these factors can empower you to make informed decisions about your credit accounts and manage your credit score effectively.

Understanding the Potential Impact:

The primary reason people fear closing a credit card is its potential impact on two key factors that influence your credit score:

• Credit Utilization Ratio: This is the percentage of your available credit that you’re currently using. It’s calculated by dividing your total outstanding balances by your total available credit. A lower credit utilization ratio is better, signaling to lenders that you’re not overly reliant on credit. Closing a credit card reduces your total available credit, potentially increasing your credit utilization ratio if you carry balances on other cards.

  • Example: Imagine you have two credit cards, each with a $5,000 limit. You have a $2,000 balance on one card. Your total available credit is $10,000, and your credit utilization is 20% ($2,000 / $10,000). If you close the card with a $5,000 limit, your total available credit drops to $5,000, and your credit utilization jumps to 40% ($2,000 / $5,000). This increase could negatively impact your score.

• Length of Credit History: The age of your credit accounts also plays a role in your credit score. Closing older credit accounts can shorten your overall credit history, which could have a minor negative effect. However, this impact is typically less significant than the credit utilization impact.

Minimizing the Impact:

Fortunately, there are steps you can take to minimize any potential negative effects when closing a credit card:

• Prioritize Paying Down Balances: This is the single most crucial step. Before even considering closing a card, pay down your outstanding balances on all your credit cards as much as possible. Ideally, aim to have a zero balance on the card you intend to close. This minimizes the impact on your credit utilization ratio.

• Consider Alternatives: Before closing a card, explore other options, such as transferring the credit limit to another card you own or downgrading to a card with no annual fee (if the fee is the reason you’re closing the account).

• Don’t Close Your Oldest Card: If you have several credit cards, avoid closing your oldest one, as it significantly contributes to your credit history.

• Closing a Charge Card is Different: Closing a charge card is less impactful than closing a traditional credit card. Charge cards typically require you to pay your balance in full each month. Because they don’t have a pre-set spending limit that influences your credit utilization, closing them usually doesn’t hurt your credit score. Think of American Express cards where you need to pay the full balance each month.

The Takeaway:

Closing a credit card can potentially affect your credit score, primarily through its impact on your credit utilization ratio and, to a lesser extent, the length of your credit history. However, by prioritizing paying down balances and carefully considering the age and type of card, you can minimize any negative impact and maintain a healthy credit score even after closing an account. Always review your credit report regularly to monitor your credit health and identify any potential issues. Don’t be afraid to close a card if it no longer serves your needs, but do so strategically to protect your valuable credit score.