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It’s a common question for many credit card users, but the answer may not be so simple. Let’s dive into the factors that could impact your credit score and what you should consider before closing a credit card.

To understand why closing an account could negatively impact your credit, you’ll need to understand the various factors that go into determining your score. There are five components that are used to calculate a credit score:
• Payment history, which speaks to your tendency to pay bills on time
• Credit utilization ratio, which is the percentage of available credit you’re using
• Length of credit history, which is the amount of time you’ve held your accounts
• New credit accounts, which represents the number of accounts you’re applying for at once
• Credit mix, which represents the various credit account types you have

Of these factors, closing an old credit card can hurt your credit utilization and your length of credit history. First, the former. For your credit utilization ratio to help your score, it needs to stay at or below 30%. This means that if your total line of credit is $10,000, you shouldn’t owe more than $3,000 at any given point in time. Therefore, if the card you’re thinking of closing gives you a $5,000 limit, and a replacement card only offers a $2,000 limit, you could end up in a scenario where you exceed that 30% threshold and wind up hurting your score. The same holds true if you cancel your credit card and don’t get another one in its place.

Then there’s the length of your credit history. Having, say, a 15-year-old account in good standing will help your score, but if you cancel that account, it’ll typically get removed from your credit record after about 10 years. Therefore, while you won’t necessarily feel the impact of closing that credit card right away, it could come to hurt you over time.

Understanding the impact of closing a credit card is key to managing your credit score. Share your experiences with credit card management with us!