Should You Close Your Credit Card Account?

Should you close your credit card account?

You may have heard that closing a credit card account will damage your credit score. Although closing a credit card will impact your credit, it still might be necessary to close your account. 

Southland wants to help you explore your options when it comes to credit cards! Use our guide to decide whether or not you should close a credit card account and what is the best way to do so. 

Will it affect your credit score?

The biggest reason that a closing a credit card may damage your credit score is because it negatively affects your credit utilization ratio. Your credit utilization ratio refers to the percentage of your available credit compared to the amount you’re using. 

For example, you may have a credit card with a $1000 limit and a $0 balance and another credit card with $1000 limit and $1000 balance. At this point, your credit utilization score would be 50%. But if you were to close the credit card with the $0 balance, your credit utilization score would jump to 100%. Since it’s recommended to keep your utilization score under 30%, this could look risky to lenders when you are applying for your next loan or credit card. 

Closing a credit card can also affect your credit score because it can lower the average age of accounts on your credit report, especially if it’s an account that has been open for a long time. The age of your accounts is factored into your credit score and longer payment histories can boost your score. However, you don’t have to worry about this as much because accounts closed in good standing stay on your credit report for 10 years and can positively impact your credit score. On the other hand, closed accounts that have missed payments associated with them will remain on your credit report for 7 years. 

Although closing a credit card account will negatively affect your credit score, it will only be temporary. As you continue to make your payments on time, it will become evident that you closed an account and didn’t take on new debt. Over time, your score will pick back up. However, don’t cancel a credit card if you plan to apply for other credit, such as a mortgage or auto loan, in the next few months. 

It may be best to keep your credit card account for the following reasons: 

  • It’s the oldest account on your credit report
  • You don’t have many other credit accounts (also known as a thin credit file)
  • The only reason why you’re canceling is that you don’t use it very often 

But, there are may also be various reasons why it is more beneficial or even necessary to close your credit card account like:

  • The card has a high annual fee and the benefits aren’t worth it to you 
  • The interest rate on the card is high and you need to carry a balance 
  • You are struggling with your debt load and are having trouble resisting the temptation of living beyond your means with the card 
  • You want to get rid of a student or secured card in exchange for a regular or rewards card 

If you decide to cancel your credit card account, here are the best ways to do so: 

  • Try to pay off your balance or transfer it to a new card with a lower interest rate before cancelling. 
  • If it’s a rewards credit card, make sure to redeem all of your rewards so they don’t go to waste. 
  • Contact your issuer’s customer support and let them know that you’d like to close the account and ask that they confirm it with a notice in writing. Ask that it be noted that the account was closed at your request. 

Closing a credit card account can make sense for certain reasons, but it’s important to understand how it can negatively affect your credit score. Southland recommends to take a look at your credit report before you decide what to do. Although the negative effects of losing a credit card account are temporary, it may be worth your while to keep a long-standing account open if possible. 

Sources: Experian and CNN