Closing a credit card account is often seen as a step toward simplifying finances or minimizing debt. However, before making this decision, it’s crucial to understand how closing your credit card impacts your credit score, borrowing power, and overall financial health. For many, keeping the account open might be the wiser choice, but certain situations make closing a credit card the right move.

How Closing a Credit Card Affects Your Credit Score

Closing a credit card account can significantly affect your credit score. Several factors influence credit scores, including the length of credit history and credit utilization. When a card is closed, it reduces the overall credit available, impacting your credit utilization ratio — the percentage of available credit being used. Experts recommend maintaining a credit utilization below 30% to prevent credit score declines.

Credit history length is also a factor. Closing one of your oldest accounts shortens the average age of your credit history, which can negatively impact your score. Since credit age represents stability and reliability to creditors, closing an old account may reduce this aspect of your creditworthiness. Although this score drop might be minor, it’s something to consider before closing an account, especially if you're planning a major purchase soon.

Benefits of Keeping a Credit Card Open

Maintaining an open credit card account can offer substantial advantages, particularly in maintaining a favorable credit score. First, an open account contributes to your overall available credit, helping keep the utilization rate low. When your credit utilization remains under 30%, it reflects positively on your credit profile, showing lenders that you responsibly manage available credit.

Aukid phumsirichat | Pexels | Keeping an open credit card account maintains a favorable credit score.

For those with limited credit history or few credit accounts, keeping a card open could also add diversity to your credit profile, which helps build and stabilize your credit score. Furthermore, if a large purchase, such as a mortgage or car loan, is on the horizon, holding onto an open account may help strengthen your loan application by demonstrating responsible credit use and reducing your debt-to-credit ratio.

When to Close a Credit Card Account

In some cases, closing your credit card can be a beneficial choice, particularly if the account brings more drawbacks than benefits. High annual fees are one of the most common reasons for closing an account. If the fees outweigh any rewards or benefits you receive from the card, closing it might improve your financial health in the long run. Reducing unnecessary costs can free up resources for other priorities or savings goals.

High-interest credit cards may also lead to financial strain if they encourage overspending. In this case, closing the card may protect against debt accumulation. However, be mindful of your overall credit profile before closing a high-interest card; consider paying off the balance and using the card sparingly rather than closing it outright.

Steps to Take Before Closing Your Credit Card

If you’ve weighed the pros and cons and decided to close your account, ensure that you follow a few essential steps. First, pay off any remaining balance on the card. Leaving an unpaid balance can complicate the closure process and impact your credit score. Paying off the balance in full also prevents accruing interest or additional charges after the account is closed.

Kindel Media | Pexels | Pay off any remaining balance before closing your credit card.

Once you’ve cleared the balance, contact your card issuer to confirm the cancellation. It’s essential to obtain written confirmation of the closure to ensure the account is fully closed. After the account closure, monitor your credit report to confirm that the account reflects a closed status and shows a zero balance.

Alternatives to Consider

If your primary motivation for closing your credit card is to avoid annual fees or high interest rates, consider alternatives. Some card issuers may offer lower-fee or no-fee options if you express interest in canceling. By switching to a no-fee card, you can maintain your account, preserving the benefits of an open line of credit without the added cost.

Alternatively, reducing the card’s usage while keeping it open can help manage spending without affecting your credit history length or utilization ratio. Using the card for small, planned purchases can keep it active without risking overspending, preserving your credit score and financial flexibility.