Will Canceling a Credit Card Hurt Your Credit Score?

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People often acquire credit cards for a variety of reasons. There are travel points here and welcome bonuses there. Some cards offer more than a year of 0% APR and have incentives for transferring balances from other cards. In many scenarios, it can make good financial sense to open up new lines of credit.

This is the exact reason many people find themselves with more than a handful of credit cards. Is it good to have a lot of credit cards, or does that make a person seem irresponsible? Especially when they do not use them often, a person may be tempted to cancel older credit cards, but think twice! In most cases, canceling a credit card will bring a person’s credit score down. Learn how having and getting rid of credit cards can change a credit score, to make the best decision about your own cards.

Best Way to Cancel a Credit Card Without Impacting Credit Score

There are two aspects of a credit score that will take the biggest potential hit from canceling a credit card. The credit utilization ratio could change significantly because of canceling a credit card. The best way to minimize this change is to either wait until all lines of credit have a zero balance or to cancel the credit card with the smallest maximum balance.

For example, suppose Sally is utilizing $100 of a card with a $200 maximum balance. She also has a $5,000 credit card that is completely paid off. If Sally cancels the $5,000 card, her credit utilization ratio will jump from 1.9% to 50%. The smarter choice is for Sally to transfer the $100 balance on the $200 card to the $5,000 card. Then, cancel the $200 card if she absolutely must cancel a credit card. In that case, her credit utilization ratio will only rise from 1.9% to 2%.

Canceling a credit card also has the potential to decrease credit score because the length of accounts is one factor in a credit score. Lengthy lines of credit have a stronger impact on the credit score than newer ones, and the length of the oldest credit account factors into the credit score. If a person got one credit card ten years ago and another two years ago, canceling the ten-year-old card will reduce the person’s longest length of account to two years.

What is a Credit Score?

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A credit score is a number ranging from 300-850 that signifies how creditworthy a person is. In other words, the score shows how likely, based on both personal history and statistics, a person is to be able to repay a loan. Higher numbers are considered to be better credit scores. Although each company is different, many lenders set minimums in the mid to high 600s for loaning money or extending a line of credit to an individual.

Credit scores are made up of a variety of factors. The number of lines of credit the person has open and the length of time these lines have been open, the total amount of debt the person is currently in, and the number of times companies have inquired about the person’s credit are a few of the factors.

Credit cards are often a young person’s easiest way to start building a credit history. Many banks even offer secured credit cards, where a person with no credit history can pay a small balance in full at the start of the relationship. Then, the person is able to use a credit card to borrow against the balance that has already been paid in full. When payments on the credit card are made, the person starts to build a credit history, and the bank does not have to take the risk of lending their own money to someone who has not already shown the ability to repay a loan.

Will Canceling a Credit Card Hurt Your Credit Score?

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One aspect of a credit score is a person’s credit utilization ratio. This is the percentage of total credit that an individual has available to use that is currently in use. Typically credit utilization ratios need to be under 30% for a person to be considered creditworthy. Utilizing 100% of available credit makes a person seem like a risky choice to lend money to. Since the credit utilization ratio is a percentage of total credit, the ratio will always increase, sometimes drastically, when total credit decreases.

For example, suppose Johnny has two lines of credit. He has a credit card through his local bank with a $500 limit, and he has another credit card with a $3,000 limit. His $3,000 card is paid off, and his $500 card is maxed out. Johnny is utilizing $500 out of the $3,500 of credit available to him, so his credit utilization ratio is ($500/$3,500) 14.29%. Suppose Johnny cancels his $3,000 credit card. Now, he is using all $500 of his available credit, so his credit utilization ratio soars up to 100%.  

When to Cancel a Credit Card

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Each person’s financial situation is different, but, in average cases, a person is better off never canceling a credit card. When people do not use credit cards, they usually do not suffer financially. If a person has ten credit cards that are either never used or are paid in full within each statement period, the person’s credit score will be just as strong, if not stronger, than a person who only has a few credit cards. Used responsibly, multiple credit cards are not a bad thing.

There are some situations where it makes sense to cancel a credit card. A change in life circumstances may be a great reason. A person who has a joint credit account with someone they no longer want to have a financial connection with would be wise to cancel the card. If a business closes, credit cards associated with the business will likely need to be canceled. When a card has an annual fee, it can often be more financially feasible to cancel the card rather than waste money on a fee for a card that is not in use. There are some people who have true spending addictions. For some, the only way to avoid overspending on a credit card is to cut off all lines of credit.

How to Cancel a Credit Card Safely

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The best-case scenario for canceling a credit card without impacting a credit score is to cancel when all balances are at $0. This allows one to cancel a card without changing the credit utilization ratio. A person who has no balances on any lines of credit has a credit utilization ratio of 0%, and that ratio will remain 0%, whether it is 0% of $300 or 0% of 3,000. It is also best to cancel the card representing the newest line of credit to retain the benefit of having a longer credit history.

When it comes to personal finances there are very few hard and fast rules. For a person who struggles to control their spending habits, canceling a credit card can be the first step on their path to financial freedom. For a person with a long credit history and utilized credit, canceling one or more credit cards may have no impact on their credit score. Yet, there are many who stand to reduce their credit score by canceling credit cards because it increases the credit utilization ratio while decreasing the length of accounts. Each person should carefully weigh their situation before canceling a card.