Closing a Credit Card Without Hurting Your Credit Score

Thinking about closing that credit card?

If you’re struggling to pay off credit card debt closing a card is tempting. It’s one less way to rack up debt.

But you might not want to close it quite yet.

Closing credit cards does reduce your credit score. Doing this at the wrong time could cost you thousands of extra dollars in the future.

Let’s go through when to cancel and when NOT to cancel.

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When Not to Cancel a Credit Card

The main downside from canceling a credit card is the hit that you credit score will take.

How does closing a credit card affect your credit score?

Your credit score is comprised of several different factors including payment history, total debt, credit utilization, and type of credit (revolving and/or installment). Your credit score weighs all of these factors to determine how much of a risk you are to lenders.

The main impact on your credit score when closing a card is through your credit utilization. When you close a card, your total available credit goes down, and your credit utilization across all credit lines goes up.

Lenders prefer lower credit utilization scores. This makes sense. If you’re maxing out your credit, there’s extra risk in giving you another loan on top of that. Whereas if someone uses 10-20% of their total credit, they have plenty of breathing room to begin with and they’d have a higher score.

For an example, let’s assume the following:

Credit Card 1: $1,000 balance, $2500 line of credit

Credit Card 2: $1,000 balance, $2000 line of credit

Credit Card 3: $500 balance, $2500 line of credit

Using the above numbers, this individual has a total of $7,000 in available credit (the total of all credit lines). But, they have a total of $2,500 in credit card debt. This means that they’re using about 28% of their available credit.

If the individual pays off and closes credit card number three, they would have less debt, but their credit utilization score would also change. They would now have $2,000 in debt and $4,500 as their credit line. Once they close credit card number three, their credit utilization jumps to 56%.

Even though this person was being responsible and paying off debt, their credit utilization goes up and their credit score gets dinged.

In the long-run, the impact on your score is minor. As long as you get your credit utilization back to 20% within a few months of closing your card, I wouldn’t worry about this too much. Paying your credit cards on time, maintaining a great credit history, and having multiple types of credit for a long period all matter a lot more.

But there is one type of situation where you want to wait before cancelling a credit card: buying a home, car, or taking out a major loan.

Whenever you make a major purchase that requires a loan, the lender will check your credit. The higher your credit score, the better the interest rate and the less you’ll pay over time.

Better interest rates will save you tens, possibly hundreds, of thousands of dollars over your lifetime. When the lender checks your score, you want the absolute highest credit rating. Every point in your credit score matters.

Don’t ever close any credit cards before requesting a major loan. You want as much credit as possible to keep your credit utilization low.

When It Makes Sense to Cancel a Credit Card

Closing a credit card will affect your credit score. And while a lower credit score can make it more difficult to qualify for loans, it may be the right decision.

Here are a few reasons I’d close a credit card:

Consolidating accounts: When I was in college, I needed any credit card that would approve me. I didn’t have much credit and options were limits. Over time, I got better accounts and my financial system got more complicated. This happens to all of us.

Add in company cards, a spouse, children, and things start to get out of hand. If you have an old credit card that you haven’t used for years and really want to simplify things, you can close it. Keep in mind that closing an old card can impact the age of your credit.

It’s a trade-off between credit score optimization and overall simplification. I’d rather have the simplicity myself, I cancelled my oldest cards that I no longer use.

Running from a big bank: This is the other one time I cancelled one of my credit cards. I had a Wells Fargo card and bank account. 3 months after depositing a check, they decided the check wasn’t any good, withdrew all my funds, and hit me with a ton of fees.

My Dad wrote that check and had the funds, it was good. And no one at Wells Fargo could ever tell me why the check was reversed so long after being deposited. I was furious. I cancelled all my accounts with them, left, and never looked back.

Debt management plan: If you’ve signed up for a debt management plan or filed for bankruptcy, you may be required to close your credit account. Your credit card company could also choose to close the account themselves.

The annual fee is too high: If your credit card has very high fees, you may want to cancel the card before you have to pay the annual fee again. Some travel credit cards like Chase Sapphire Rewards and Citi Prestige Card have fees as high as $450 per year.

While these cards certainly have perks, the high annual fee can be a bit tough for some customers. If your financial situation changes and the annual fee isn’t sustainable, close the card. Most banks have versions of these cards that have fewer perks at a lower annual fee, you might be able to downgrade instead of cancelling outright.

If you can’t stop spending:  Once you’ve gotten into the habit of making purchases on your credit card beyond your means, it’s a cycle that’s difficult to stop. If it works for you, cancel your credit cards. Maximizing your credit score isn’t nearly as important as getting ahead of your credit card on time and paying your cards off in full every month.

You don’t need to your credit score for a while: If you won’t need to rely on your score for anything (new loans, refinancing a mortgage, buying insurance etc.) and you want to get rid of a card, you can likely close your credit card account safely. Even if your score does drop, continuing to make on-time payments and lowering your other debt can help raise your score again.

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Here’s How to close a credit card (the right way)

If you’re set on closing your credit card account, make sure you reduce the impact on your credit score by taking the proper steps.

Step 1: Redeem any rewards or points

Make sure you redeem any cash rewards or point rewards before closing your credit card account. You will most likely lose any reward you don’t use once you close the account.

Check your account about a month before you plan to close your credit card account and make sure you don’t miss out on any perks you may have forgotten about. Some rewards cards allow you to transfer points to airlines or hotels. That’s an easy way to get your rewards out without having to spend them all before closing the card.

Step 2: Pay off all credit card debt

You could do a balance transfer on any debt that’s still on the card. But to be honest, you really should pay off the card in full before closing it. Either way, make sure the card doesn’t have a balance and then stop using it for any ongoing purchases. You don’t want to have a few charges still processing when you go to close the card.

Step 3: Cancel your card

Make a phone call the credit card company to close your account. You’ll want to make sure your account really is at zero (fees and interest sometimes show up late) before you close your account.

When you call the customer service rep may try to talk you into staying with the company. Occasionally they may offer special perks or reduced interest rates to keep your business. If you really want to cancel your card, be polite, but firm.

At this point, you’ll typically get transferred to someone at the bank that double and triple confirms you want to close the account. Go through the whole process.

Step 4: Wait a month and check

Wait a month for everything to process. Then you’ll want to check two things.

First, check your credit report and make sure the accounts are listed as “closed by customer.” Credit reports are usually accurate but mistakes do happen that can impact you for years. Make sure nothing was reporting incorrectly when closing your account.

Second, log into your bank and make sure the credit card still has a zero balance. Weird fees can pop up as the account is closing which will then recrue interest and more fees if they go ignored. It’s really easy to miss these. I got dinged with a last-minute fee when closing my Wells Fargo card years ago. Feel free to call the bank and try to fight it, just don’t ignore it.

Is Closing a Credit Card Worth It?

Keeping your credit card open, even if you don’t use it, is a smart way to maintain a healthy credit score. Additionally, having access to those additional funds in the event of an emergency could be helpful.

While closing your credit card will likely affect your credit score, you can still do it safely.

If you’re trying to completely optimize your credit score, you’ll want to keep your cards open. If you want simplicity or have another reason to close the account, go for it. Just don’t close any accounts within a few months before applying for a loan.

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Written by

Host of Netflix's "How to Get Rich", NYT Bestselling Author & host of the hit I Will Teach You To Be Rich Podcast. For over 20 years, Ramit has been sharing proven strategies to help people like you take control of their money and live a Rich Life.