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Closing a Credit Card Could Impact Your Credit Score — How to Avoid Issues

Anuradha Garg - Author
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Jun. 15 2022, Published 8:43 a.m. ET

Your creditworthiness and credit score are important since they dictate the decisions of a number of lenders. People have become cautious while trying to navigate through their credit scores. One question that often comes up is, does canceling a credit card hurt your credit score?

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You might have heard credit experts saying that it's better to leave your credit card accounts open even if you aren't using them. This is because closing a credit card can have a negative impact on your credit score. However, that doesn’t necessarily need to be the case. In fact, there are ways you can cancel your credit card without dinging your credit score.

When to close a credit card account?

You might want to cancel your credit card for a number of reasons, such as if you can’t responsibly keep up with the credit card payments, if the annual fee on your credit card is high, and if its benefits don’t offset the cost. It's also important to close joint accounts in an event of divorce or separation. However, getting rid of the negative activity on a card through its closure isn't a good strategy since it will show on in your history for several years. Some people also close a credit card if they pay it off and don't need it anymore.

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How does closing a credit card impact your credit utilization ratio?

Opening or closing a credit card impacts your credit utilization ratio, which ultimately impacts your credit score. Credit utilization is basically your total credit card debt divided by your total credit card limits. Lower credit utilization is good for your credit score and vice versa. Closing a credit card could potentially mean more debt per remaining card, which could increase your credit utilization rate.

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How to close a credit card without harming your credit score

One of the ways to prevent the closing of a card from harming your credit score is to pay your balance in full before you close the card. If there isn't a remaining balance on any of your cards, you can close a card without harming your credit score. It's best practice to pay down your credit card balances in full each month to avoid expensive credit card interest and to protect your score from late payments.

Ideally, maintaining a credit utilization ratio of 0 percent to 10 percent is best if you want to maximize your credit scores. However, if you aren't planning to apply for financing in the near future, a utilization rate of less than 30 percent may be sufficient.

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“Thin” credit category and credit history determine a credit score.

Another way that closing a credit card could potentially impact your credit score is if your other open credit accounts are limited or you don't have any other accounts. Closing a card might move you into the “thin” credit category. With a thin credit report, it's usually difficult to obtain a good credit score.

Some credit scoring companies don’t consider a closed credit card while calculating the age of your credit history. Therefore, closing a positive account that you had for a while could impact your credit score negatively under those scoring models.

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