How does canceling a credit card hurt credit score?


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What should you do with a credit card you don’t want to use anymore? You might assume that canceling the card is the best option, but be careful — closing a credit card isn’t always a good idea. A lot of people don’t realize that canceling a credit card can hurt their credit score.

A recent Bankrate survey found that 29% of Americans don’t know whether or not closing a credit card will hurt their credit score, 15% think it has no effect and 13% incorrectly believe it will increase their credit score.

There are a couple of good reasons to close a credit card, but there are also a lot of reasons to keep it active. Here’s what you need to know.

How canceling a credit card hurts your credit score

There are many ways in which canceling a credit card can hurt your credit score — and in most cases, your credit score will take multiple hits. These are some of the ways in which your credit score might be affected:

Age of credit

Canceling a card can dramatically shorten your overall credit history as depicted on your credit report, and accounts that have been open for multiple years are likely to deliver the biggest negative impact. The longer your account has been open, the more important it is.

Credit utilization ratio

By closing a card, you’ll have less credit available to you. This decrease in credit available can negatively impact your credit utilization ratio by raising it. You’ll especially be at risk if you don’t pay off your card in full each month or tend to keep high balances.

Credit mix

Credit mix can also be impacted. Your credit mix is the assortment of different types of credit you have, like credit cards, car loans, student loans, and mortgages. If you only have two cards, for example, closing one of them will result in a much less robust credit mix ⁠— especially if you don’t have additional financial obligations like a car, mortgage or student loan.

Payment history

Payment history on a closed account stays on your credit report, which means a good payment history will continue to help your score, while a negative payment history will continue to hurt it. Payment history on your credit obligations accounts for 35 percent of your credit score.

However, the impact that the payment history of a closed account has on your score will lessen over time. Eventually, the payment history will fall off your credit report and no longer be part of your credit score. For negative payment history, that’s after seven years. For good payment history, the cutoff is 10 years.

When you should cancel a credit card

There are a couple of situations in which canceling a credit card makes sense. If you have a rewards credit card with an annual fee, for example, you might decide that you aren’t earning enough rewards to justify the annual cost of the card. In that case, it might be a good idea to cancel the credit card and switch to a no-annual-fee card.

You might also find yourself in a situation where an old credit card is no longer useful. For example, if you move from Washington to Iowa, your Alaska Airlines Visa Signature® credit card is probably going to become obsolete — Alaska Airlines doesn’t fly out of Cedar Rapids, IA. Instead, a card like the Delta SkyMiles® Gold American Express Card will likely be more useful for airline miles and travel perks. Since both cards charge annual fees, it’s a good idea to drop the card that no longer works.

Alternatives to canceling a credit card

Transfer your balance to a new card

If you want to cancel a credit card due to its high interest rate, consider keeping the credit card active (to avoid the hit on your credit score) and switching your spending to a different credit card instead. If you have an outstanding balance on the high interest rate card, use a balance transfer credit card to transfer your balance and pay it off during an interest-free grace period. The Discover it® Balance Transfer card, for example, offers a zero percent APR on balance transfers for 18 months (13.74 percent – 24.74 percent variable APR thereafter) — as well as some excellent cash back rewards.

Upgrade or downgrade to another credit card

If you’re thinking about canceling a credit card because you want to trade up to a sibling card that offers better rewards — like switching from the Capital One® VentureOne® Rewards Credit Card, which offers 1.25 miles per dollar on every purchase, to the Capital One® Venture® Rewards Credit Card, which offers 2 miles per dollar — contact your card issuer and ask for an upgrade. In many cases, you can upgrade your credit card online. That way, you’ll get the card benefits you want without having to close a credit account. (You can also downgrade a credit card using the same process, if you want to go from an annual fee version to a no-annual-fee version.)

Use your card for a small subscription payment

Lastly, remember that you don’t have to cancel an old credit card just because you’d rather put the majority of your spending on a new credit card. Put your spending on the card you want, and keep your other credit cards active so that they continue to benefit your credit history and credit score. You may have to put the occasional purchase on your old credit card to ensure your account isn’t closed for inactivity, though. Many people solve this problem by setting up a single subscription payment on each old credit account (one credit card pays for Netflix, another card covers the gym membership) and setting up automatic payments to ensure their credit cards get paid on time every month.

The bottom line

Although many people think they’re supposed to cancel old credit cards when they’re no longer interested in using them, closing a credit card is generally a bad idea. It’s better for your credit score to keep old credit cards open for as long as possible, unless those cards are charging annual fees that you’d rather not pay. Keep old credit accounts active by charging small purchases to each credit card every month and paying them off in full every time.