It might seem like common sense to think that individuals would be rewarded (or at least not penalized) for closing a credit card. Doesn’t it show good credit sense? Whether you want to close a credit card to remove the temptation of using credit you can’t pay back, or you have other credit cards that offer better rewards and benefits, you may be surprised to find that closing an account may negatively affect your credit score. (See also: The 5 Things With the Biggest Impact on Your Credit Score)
Why a closed account dings your score
It’s important to know why closing a card negatively affects your credit score. Here are the two main reasons.
Your account history is shortened
If you close an account that you have had for several years, then you are cutting your account history short. Closing a credit card that you have had for almost a decade will have a bigger impact on your score than closing a card you’ve had less than a year.
Your credit utilization rate changes
If you currently have $2,500 in credit card debt, but have three cards that give you a total $15,000 credit limit, your current credit utilization rate is just over 16 percent. However, if you cancel one of the cards, and that card had a credit limit of $8,000, then you just decreased your overall credit line to $7,000. Your credit utilization ratio will now increase to over 35 percent. Having a credit utilization rate over 30 percent will negatively impact your credit score.
Ask for a card change instead of canceling
If you want to ditch a certain credit card due to high annual fees, you may be able to downgrade your card without canceling the account. Call the creditor and ask if you can change to a lower or zero fee card.
Asking for a card change is also important for those who are using a secured card to boost their credit score. Some secured cards may automatically upgrade your account to an unsecured one, but not always. If your account is in good standing, the creditor should move your account to a better card. (See also: Best Secured Credit Cards)
Ask for credit limit increase on other cards
If you are still set on closing your credit card account, you can minimize the damage by asking for a credit limit increase from other cards you’re keeping. This will prevent your credit utilization ratio from changing dramatically.
Close the newest cards first
Choose a newer card to cancel rather than an old one. This will prevent your score from dropping too much from a shortened overall account history. Don’t close any accounts if you are planning to apply for loans soon. It will take your score a few months to recover. If a lender pulls your report shortly after you’ve closed your accounts, they’ll see some account activity that may make them less likely to approve a loan, not to mention your sudden drop in score.
Finally, be sure to monitor your credit score for a few months after you close your account to ensure everything went smoothly and no errors were reported. (See also: 5 Ways to Improve Your Credit Score Fast)
Why not just keep the card?
Credit card accounts in good standing will continue to positively impact your account for many years. Unless you’re paying an annual fee for a card you’re no longer using, it may be just as effective if you put it away in a safe place. This way you won’t risk lowering your credit score.
However, if you do decide to close some accounts, keep these things in mind so it has a minimal impact on your score.