Scissors cutting up closed credit cardsFor a variety of personal reasons closing credit card accounts might seem like a good idea.

Do these reasons to do so sound familiar?

  • You want to avoid (or end) the temptation.
  • You’re tired of pesky annual fees.
  • The rewards aren’t as useful as advertised.
  • Keeping up with a bunch of closing dates is a pain, and the penalties if you’re late — even just one single, puny time — can be punishing.
  • You have some accounts you haven’t used in years and you have enough worries about crafty data thieves cracking the accounts you do use.

Every one of those constitutes a perfectly rational reason for shutting down one or two or even several credit cards. And if your call to action is a landslide of celebration-inspired bills – Christmas, Easter, birthdays, weddings, etc. – Riley Adams gets it.

“An unintended binge-spend during the holidays can often elicit some consequences on your financial bottom line,” says CPA Riley Adams, a Google Senior Financial Analyst. “For those shocked enough, they decide to cancel one or several credit cards. They reason: ‘I can’t spend on credit cards I don’t have.’

“While, on the face, that makes sound financial sense, it often manifests in negative consequences in unexpected ways.”

Understand, too, that if your mind is made up, there are ways to soften the blow — that, in fact, done strategically, you can close credit cards and actually improve your FICO score.

Does It Hurt Your Credit Score to Close Credit Card Accounts?

Random closing of credit card accounts — without careful planning — almost certainly will lower your credit score because you are reducing your available credit and lowering the average age of your accounts.

Credit scores are based on five factors, two of them closely linked to your credit card accounts account for half:

  1. Average age of accounts (15%)
  2. Overall credit utilization (35%)

At the same time you think you’re acting responsibly, lowering your average account age and/or raising your credit utilization ratio — which you’ll almost certainly do if you don’t act strategically — will drive down your credit-worthiness.

How Much Does Closing a Credit Card Hurt Your Credit?

“People should think very carefully about canceling a credit card on which they have developed a positive payment history,” says Freddie Huynh, who logged 18 years as FICO’s lead data scientist before joining San Mateo, Calif.-based Freedom Financial Network as its vice president for credit-risk analytics.

“The longer you hold such an account,” Huynh says, “the more valuable it is in your credit score determination. This is because more credit history provides prospective lenders with more information on a borrower’s financial behavior over time.”

If you close any card older than your average account age, you’ll reduce your average and your score will take a whack. For instance, a consumer has five credit cards, 15, 12, 7, 3, and 2 years old, resulting in an average account age of 7.8 years. Close both the older cards and the consumer’s average account ages slips dramatically, to 4 years. That’s not much credit history; Huynh says and FICO will respond negatively.

Shut down a card with lots of available spending room – credit limit $5,000 or higher, for example – and you’ll squeeze your credit utilization ratio.

And — you guessed it — that’s another whack at your credit score.

Now, consider the consumer who’s maintaining the preferred credit utilization by spending less than 30% of his credit limit. Let’s say he is using three cards with limits of $10,000, $8,000, and $5,000 for a total credit limit of $23,000. If he spends $7,000 across the three cards he is right at the recommended 30% limit (7,000 ÷ 23,000 = 30.4%).

But, worried about the temptation to spend more, he closes the $10,000 card. That means he’s spending $7,000 on cards with a total credit limit of $13,000 (8,000 + 5,000 = 13,000) and his credit utilization soars to 54% (7,000 ÷ 13,000 = 53.8%).

He’s well over the recommended credit utilization of 30% and his FICO score will take a hit.

Additionally, don’t think by closing problem cards you’ll erase a bad payment history. Open or not, the stain of late payments linger on a card for seven to 10 years, and once it’s closed, you won’t benefit from the age of the card. (Better to contact the creditor and see about trading good behavior — say a year of automated, punctual payments — for expunging all reports of late payments.)

Closing Multiple Credit Cards

If, as demonstrated above, closing even one credit card account can cause downstream damage to your credit score, imagine the harm closing multiple cards at once can wreak.

Again, balances and reports of late payments aren’t going away just because you shutter an account. Instead, you’ll almost certainly wind up drastically dropping your average-account age while causing your credit utilization to spike.

Above all, then, if your “close-my-accounts” resolve is firm, do all you can to hang onto your oldest cards, as well as those with the highest credit limits.

Before acting rashly consider healthy alternatives to closing your credit cards:

  • Contact your creditors about putting a freeze on your spending.
  • Freeze all but a single, must-have-for-emergencies card in a block of ice. (Also, stay away from the hairdryer, says SmartPath financial planner Alex Wilson.)
  • Whip out the scissors. Cut them up. Or feed them to a nearby shredder.
  • Alternately, Finder.com credit card analyst Kevin Chen suggests you give all but your emergency card to a trusted friend or relative to put in safekeeping for a specified amount of time.
  • Stash your cards in a safe deposit box.
  • Experts agree: Erase all your stored credit information from internet shopping sites.

The idea — and it’s a good one — is to make access to your cards and credit inconvenient.

“Study after study shows that when we use plastic money,” says Katie Utterback, the San Diego-based host of Talk Wealth To Me Podcast, “the pain receptors in our brain don’t light up like they do when we use cash. In other words, it’s super easy to overspend when we use credit cards.”

Yet another reason cash is king. Wait. There’s more.

Look for efficient ways to repay your balances, suggests certified financial planner Matt Frankel, a Columbia, S.C.-based contributor to The Ascent. “A personal loan can help you consolidate your debt, give you a fixed monthly payment, and in many cases can reduce your interest rate,” Frankel says.

“Or, although it may sound counterintuitive, it could be worth applying for another credit card that offers 0% APR balance transfers for a certain number of months. In addition to saving you tons of money on interest, this can actually have the effect of increasing your credit score by lowering your overall credit utilization.”

If what’s brought you to the brink is a crisis in managing your credit card and pile-on debt, you should consider going through a credit counseling session. (Don’t worry about embarrassment; they’ve heard stories far more harrowing than yours — and they’ve helped those folks, too.)

Your counselor may simply provide guidance about better budgeting and economizing. However, if your predicament is extreme, you may be encouraged to — despite all you have read up to now — close several cards as part of entering a debt management program.

The downside is as described above: Your credit score will, in the short term, suffer. The upside is all long term: A debt management program will help lower interest rates on your credit card debt; consolidate payments into a single, often lower, payment; and, in three to five years, end with you being debt-free.

Also, within months of beginning a debt management program, you’ll see your FICO score begin steadily rising (because of timely payments) toward maximum health.

Cancelling Unused Credit Cards

While we admire your instinct to do away with accounts you are not using, by now you have figured out that much in the world of consumer finance seems convoluted. Simply put, the Big Three credit bureaus like it when they see more and older accounts and more available credit.

“If you have other credit cards with high balances,” notes Anchorage, Alaska-based financial planner Chad Rixse, “closing unused cards increases your utilization rate, which can also reduce your score.

“However, if you keep accounts open, even with no balance, they stay on your credit report, increase your total amount of credit available, decrease your utilization rate, and remain as a positive mark on your report.”

Moreover, if the unused card(s) you intend to close is fairly new, has a low credit limit, or you don’t have much debt, there’s likely to be a minimal impact on your credit score.

When to Close a Credit Card

To reiterate: All things being equal, it’s best to keep accounts open. This is not to say there aren’t situations where selectively shutting them down makes sense.

Those situations include:

  • High annual fees that outweigh your ability to take advantage of the benefits.
  • High interest rates (if you carry a balance).
  • You have run into trouble managing the debt you’ve incurred, but the easy access to credit tempts you to live beyond your means (and you lack the discipline to lock it away).
  • You’re ready to exchange a student or secured card for a traditional or rewards card.
  • You’re getting divorced and you share accounts with your future ex-spouse.

If your trigger is/are high annual fees and/or high interest rates, check with the issuer about keeping your account open with a low- or no-fee option — most awards cards have them — and/or reducing your interest rate. Explain that if you can’t come to an accommodation, you’ll have to close the account. Most companies want to keep your business.

How to Properly Close a Credit Card

Still determined to close an account or three? Your commitment to a course of action is commendable — so long as you do it properly.

  • Do you have a balance? Pay it off. If you can’t manage that, develop a plan with the card issuer to do so.
  • Are you closing a rewards card? Spend your points or miles before you shut it down. You earned them, after all.
  • If you’re closing accounts simply because you have too many, review whether closing newer accounts (especially those with lower credit limits) is to your advantage. By shedding newer accounts, you might actually boost your average account age and your FICO score.
  • Contact the issuer’s customer service department to let them know you intend to cancel the card. They may offer lower interest rates or enrollment in a no-fee rewards program. (If your commitment to canceling is firm, you can ignore these sweeteners.)
  • Make a record of your request by following up in writing. Use the customer message center on the issuer’s website, or follow the instructions on its “Contact Us” link. Watch for a response.
  • Make sure the account is closed after some time passes and destroy the card, as well as all evidence of it on your internet shopping accounts.

Again, the decision to shut down credit card accounts — even those you never use — must not be taken lightly. You very likely will damage your FICO score, which may be precisely what you’re attempting to avoid.

If temptation is your weakness, review the alternatives above. There are smart ways to subdue your bad spending habits short of cutting off your access to credit.

Need guidance from a professional who can provide expertise as well as accountability? Consider consulting a nonprofit credit counseling agency, such as InCharge. You could learn the fix you’re in isn’t as awful as you think.

If it is, well, they have solutions for that, too.


Sources

Harzog, B. (2018, October 31) Is It Always Bad to Cancel a Credit Card? Retrieved from https://creditcards.usnews.com/articles/is-it-always-bad-to-cancel-a-credit-card

Anshel, D. (2019, February 13) How to Close a Credit Card the Right Way. Retrieved from https://creditcards.usnews.com/articles/how-to-close-a-credit-card-the-right-way

NA (ND) Will closing a credit card account help my FICO score? Retrieved from https://www.myfico.com/credit-education/faq/cards/impact-of-closing-credit-card-account

Singletary, M. (2017, January 17) The best way to get rid of a credit card. Retrieved from https://www.washingtonpost.com/business/get-there/the-best-way-to-get-rid-of-a-credit-card/2017/01/17/0f47e066-dced-11e6-ad42-f3375f271c9c_story.html