Why You Should Never Close a Credit Card

Closing a credit card account may seem like a good idea if you no longer use the card or want to simplify your finances. However closing a credit card can actually hurt your credit score and have unintended consequences. Here’s why you should think twice before closing a credit card account.

It Can Increase Your Credit Utilization Ratio

One of the biggest factors in your credit score is your credit utilization ratio – the amount of credit you’re using compared to your total available credit Generally, experts recommend keeping your utilization below 30%

When you close a credit card, you lower your total available credit. This means your utilization ratio will increase, even if your balances stay the same.

For example, say you have:

• Card 1 with a $5,000 limit and $1,500 balance
• Card 2 with a $3,000 limit and $1,000 balance
• Total credit: $8,000
• Total balances: $2,500
• Utilization ratio: 31%

If you close Card 2, your available credit drops to $5,000 but your balances stay at $2,500. Now your utilization jumps to 50% – a level that can hurt your credit score.

It Can Shorten Your Credit History

The length of your credit history also factors into your credit score. When you close a card, you lose the history associated with that account.

This isn’t an immediate issue. Closed accounts actually stay on your credit reports for 10 years. But once that decade passes, your credit history will shortened.

This is especially problematic if you close one of your oldest credit card accounts. Having long-standing accounts demonstrates you can responsibly manage credit over time.

It Can Impact Your Credit Mix

Credit scoring models also look at your mix of credit – whether you have experience with different types of accounts like credit cards, installment loans, mortgages, etc.

Having a variety of account types on your credit report shows lenders you can handle different types of credit responsibly. If you close your only credit card, you’d be left with just installment loans or other credit accounts. This less diverse credit mix could negatively impact your score.

You Lose the Card’s Benefits

When you close a credit card, you immediately lose access to any perks and benefits associated with the account:

• Rewards – Any rewards you’ve earned but haven’t redeemed yet could be forfeited. You also lose the ability to earn more rewards with that card.

• Special financing offers – Subject to eligibility, credit cards may offer 0% intro APRs on purchases and balance transfers. You’d lose access to these deals.

• Insurance protections – Credit cards often include rental car insurance, extended warranties, and other protections. These benefits disappear if you close the account.

• Dispute assistance – Credit card companies have dedicated departments to assist with transaction disputes. This valuable perk goes away after closure.

It Can Hurt Your Chances of Getting Credit

Closing a credit card account may also make it more difficult to get approved for new credit in the future. Here’s why:

• Reduced available credit – As we discussed earlier, closing an account lowers your total credit limit. This also lowers the amount of new credit lenders are willing to extend.

• Shortened credit history – If you close an older, established account, it reduces your overall length of credit history which could make lenders view you as riskier.

• Closed account status – Having a closed credit card account on your credit reports can be seen negatively by some lenders when they review your application.

Alternatives to Closing a Card

Instead of closing a credit card account, consider these options to avoid potential damage to your credit:

• Ask the issuer to waive the annual fee – It may be possible to keep the account without paying a yearly fee.

• See if you can product change to a no-fee card – Issuers often let you switch to a different card product without closing your account.

• Make occasional small purchases – Putting a small charge on the card every few months shows activity and can prevent closure by the issuer.

• Use it for one monthly bill – Set up autopay to pay a small recurring bill like a streaming service. This maintains activity without much effort.

• Keep unused cards open but destroy them – Cancel the physical card but keep the account open to preserve the benefits listed above.

When Can Closing a Card Make Sense?

There are a few scenarios where the drawbacks of closing a credit card may be outweighed by other factors:

• The card has an unusable high annual fee you can’t get waived. Paying for a card you don’t use doesn’t make financial sense.

• You opened the card for a temporary promotional offer but don’t plan to use it long term. For example, 0% financing for a large purchase.

• The card is from a retailer you no longer patronize. Keeping a store-specific credit card open for a place you don’t shop at is pointless.

• The card has an outrageously high interest rate compared to other options. If you carry a balance month-to-month, look for a lower rate card.

• You have trouble controlling spending habits with the card. Eliminating temptation can be beneficial for your financial health.

• You’re consolidating debt with a balance transfer and don’t need the old card. Focus on paying off the new card with lower interest.

The Bottom Line

Closing a credit card account can negatively impact your credit score in several ways. Your credit history shortens, your utilization ratio increases, and your credit mix worsens. You also lose any perks and benefits associated with the card.

However, there are some situations where closure makes sense for your financial situation. Before making the decision, understand the consequences to your credit and look for alternatives like product changes, annual fee waivers, and account downgrades. With some strategic planning, you can often keep a card open and avoid credit damage.