Does Cancelling a Credit Card Affect Your Credit Score?

Cancelling a credit card is a decision that many individuals face, often wondering how it may impact their credit score. This is especially true for anyone who has received the welcome bonus and doesn’t want to pay the annual fee again.

Closing a credit card can affect your credit score, but it depends on various factors. If you have multiple cards, it likely won’t make a huge difference, but it can have a significant impact if it’s your only card.

Comprehending the nuances of how credit scores are calculated can assist you in making informed decisions about whether to cancel a credit card.

How Cancelling a Credit Card Affects Your Credit Score

Cancelling a credit card can influence several aspects of your credit score, including your credit utilization ratio and the length of your credit history. Depending on your situation, your credit score may drop or not change at all.

Credit Utilization

One of the most critical factors in your credit score is your credit utilization ratio. This ratio compares your current credit card balances relative to your total available credit. When you cancel a credit card, you reduce your total available credit, which may increase your credit utilization ratio.

For example, let’s say you have two cards with a combined limit of $10,000 ($5,000 each) and owe $2,000, your credit utilization ratio is 20%. This is perfectly fine, as the credit bureaus consider a utilization ratio of 40% or less to be good.

However, if you cancel one of your cards, your available credit drops to $5,000, making your utilization ratio 40%. That puts you over the recommended utilization rati,o so your credit score could drop.

Length of Credit

The length of your credit history accounts for about 15% of your credit score. This includes the ages of your oldest account, your newest account, and the average age of all your accounts. Cancelling an older credit card can shorten the average age of your accounts, potentially leading to a decrease in your credit score.

It’s best to keep your oldest accounts open when possible. If you’re worried about annual fees, you could ask to be switched to a no-fee card. Credit card switches don’t affect your credit history as it’s not considered a closed card or a new application.

Factors to Consider Before Cancelling a Credit Card

Cancelling a credit card requires careful consideration of several factors, including annual fees, the benefits of keeping older accounts open, and the rewards and advantages associated with the card.

Annual Fees

Annual fees can vary widely among credit cards. Some cards charge high annual fees with plenty of benefits, while others have no annual fee.

If the benefits outweigh the annual fee, it might make sense to keep the card. For example, the Marriott Bonvoy American Express Card has an annual fee of $120, but you get a free night certificate worth up to 35,000 points each year. That free night is worth about $280, which is clearly more than the annual fee.

If the benefits you’re getting don’t outweigh the annual fee, then cancel your card. That said, downgrading to a no-fee card is another option.

Keeping Older Accounts Open

Older accounts can positively impact your credit score by increasing the average age of your credit history. Closing an older credit card account might reduce this average, potentially lowering your credit score.

Unused credit cards still contribute to your overall credit limit, reducing your credit utilization ratio, a key factor in credit scoring.

While keeping your older credit card open is important, it may not make a difference if you have multiple cards with lengthy histories.

Strategies for Minimizing Negative Effects on Credit Score

When cancelling a credit card, it’s important to consider various strategies to minimize potential negative impacts on your credit score. This includes switching to a no fee card, paying down balances before cancellation, and timing the cancellation carefully.

Swapping to a No Fee Card

One strategy involves switching to a no-fee card instead of cancelling your existing credit card. By maintaining the account, the cardholder maintains the length of their credit history and avoids a potential setback in their credit score due to a shortened history. 

A no fee card can help retain available credit, which means your credit utilization ratio remains the same. 

Paying Down Balances Before Cancellation

Before cancelling any credit card, paying down existing balances is recommended. This reduces the reported balance during the statement closing date, directly impacting credit utilization ratios. 

By fully paying off balances or significantly lowering them, the reduction in available credit from closing an account becomes less damaging. It is generally recommended to keep utilization ratios below 30% to maintain or improve credit scores. This step is crucial in preventing a significant drop in credit score after cancellation.

Timing Your Credit Card Cancellation

Choosing the right time to cancel a credit card can also mitigate negative effects. It’s usually best to avoid cancelling cards shortly before applying for a loan or mortgage, as a credit score setback can impact approval chances. 

It also makes sense to cancel your cards right before the next annual fee posts. While this doesn’t affect your credit score, it will have an impact on your wallet.

Reasons for cancelling credit cards

There are various reasons why individuals choose to cancel their credit cards. These can range from high fees to significant life changes and the availability of better financial products. Each reason has unique implications that need careful consideration to ensure minimal impact on one’s credit score.

High annual fees

Some credit cards have high annual fees that surpass their benefits. Cardholders often feel that the cost of these fees is not justified by the rewards or perks offered.

For example, if a card offers 1% cash back but charges an annual fee of $150, someone spending less than $15,000 per year might not benefit. In such cases, cancelling the card can be a cost-saving move.

Better benefits available

Credit cards continuously evolve, and better benefits may become available. This could include lower interest rates, higher cashback percentages, or more enticing travel rewards.

Alternatively, you might have decided that you have different goals for your credit cards. For example, if you plan to travel more, cancelling your cash back card and getting a premium travel credit card could be beneficial.

Access to too much credit

Having access to excessive credit can lead to overspending and elevated balances. Cancelling a credit card can help manage your overall credit more effectively.

By reducing the total credit you can access, you may find it easier to stick to a budget and avoid falling into debt. However, you must also consider the potential impact on your credit utilization ratio, which can affect your credit score.

Final thoughts

While cancelling a credit card can have an impact on your credit score, it likely won’t make a huge difference in the grand scheme of things if you have other active credit cards.