Course 8

Closing a Credit Card? Read This First

It sounds logical — you paid off that old credit card, so you should close it, right? Not so fast. That one decision could drop your credit score by more points than you expect.

Closing a credit card has two direct negative effects on your credit score that most people don't realize until after the damage is done.

First, it reduces your total available credit. When you close a card, you lose that card's credit limit. Your total credit utilization ratio — the percentage of your available credit you're using — immediately increases, even if your spending hasn't changed. Since utilization accounts for 30% of your score, this impact can be significant.

For example: if you have three cards with a combined limit of $15,000 and you're carrying $3,000 in balances, your utilization is 20%. If you close one card with a $5,000 limit, your available credit drops to $10,000 and your utilization jumps to 30% — all without spending a single additional dollar.

Second, closing an account may shorten your credit history. The length of your credit history accounts for 15% of your score, and it includes the age of your oldest account, your newest account and the average age of all accounts. Closing an older account can reduce that average and may eventually lower your score.

So when should you close a credit card? In some cases, it does make sense — if the card has a high annual fee and you're not getting value from it, or if having the card is a temptation to overspend. In those cases, the benefits may outweigh the temporary score impact.

Before closing any account, consider: How long have you had the card? What's your current utilization? Do you have other cards with strong history? Is there an annual fee?

Often, the best strategy is to keep old cards open, use them occasionally for a small purchase and pay the balance in full. This keeps the account active, maintains your available credit and preserves your credit history — all without adding any debt.