March 2, 2022

When is it OK to close a Credit Card?

A Credit Card Can Positively Impact Your Credit Score In 2 Ways. Consider this information before closing one down.


When is it OK to close a Credit Card?

A Credit Card Can Positively Impact Your Credit Score In 2 Ways

1) Age of Credit and 2) Credit Utilization 

Closing a credit card may negatively impact your credit score as the positive impact that it had will be removed.

Age of Credit

The age of one's credit profile is one of the five primary factors in determining one's credit score (10-15%**). If you are considering closing a credit card that is one of your oldest tradelines (this can be determined relatively easily by scanning your credit report and looking at open dates), then that will impact your credit score negatively.

Credit Utilization. 

The amount of credit one uses is a significant factor in one's score. If the card you are considering closing has a small credit limit or your credit utilization is under 20%, then your score won't really be impacted negatively by closing the credit card. Otherwise, there will be a negative impact (in proportion to your credit usage).

Ok, so if closing my credit card will hurt my credit score; what are my alternatives?

Option 1:

Keep it open. There is no downside to keeping credit cards open if there are no annual fees. 

Option 2:

If there is an annual fee, many credit card companies will provide an alternative membership, albeit with fewer perks and rewards, for no annual fee. Consider downgrading your membership so that you can avoid the fee while maintaining the benefits of the credit card (age of credit and credit usage). Alternatively, if you call the credit card company and tell them you want to cancel due to the annual fees (since you aren't getting value from the card to justify the cost), the majority of the time, they will waive the yearly fee for that year.

This is a temporary fix as you'll have to call and try again next year as opposed to when you downgrade membership (you don't have to hassle down the road).

Option 3:

Combine credit card limits. If you have another open credit card account with the same bank, the credit card company will usually let you consolidate your cards into one. Doing so will address your credit usage impact since you will have the same overall credit limit. In fact, it can help your credit score as the card you want to close you presumably don't use. Weirdly, having no credit utilization can hurt your score, so if you combine this unused card with a card you use (hopefully not more than 30%!), you will keep the same credit usage while removing a non-used credit card).

However, this option will not address the impact on your credit age (you can check with the credit card company, but the card that will remain active won't get the consolidating card's open date). Still, if the card you want to close isn't one of your oldest tradelines, it's probably the best option and isn't a temporary fix (like waiving the annual fee is).

Sounds like a lot of calculations and factors? That's true; that's why we here at Kredit built a credit building robo-advisor that does all the analysis and calculations to help you make the right decision. 

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