Does Closing a Credit Card Hurt Your Credit Score?

Closing a credit card can seem like a simple step toward simplifying your finances. However, understanding how closing a credit card affects your credit score is crucial, as this action can have lasting implications for your financial health. In Canada, the impact of closing a credit card on your credit score depends on multiple factors, including the card’s age, your credit utilization, and your overall credit history. In this guide, we’ll explore how closing a credit card can influence your credit score, provide insights into when it might be a good decision, and discuss strategies to help you manage your credit wisely.

How Your Credit Score Is Calculated

To understand how closing a credit card affects your credit score, it’s essential first to know how your score is calculated. Credit scores in Canada range from 300 to 900, with a higher score indicating better creditworthiness. Two main credit bureaus, Equifax and TransUnion, calculate your score based on the following factors:

1. Payment History (35%): This reflects your record of paying bills on time. Missed or late payments have a significant negative impact on your score.
2. Credit Utilization (30%): This is the percentage of your available credit that you’re currently using. A lower utilization rate is generally better for your score.
3. Length of Credit History (15%): This factor considers the age of your accounts. Older accounts contribute positively to your score by showing a stable credit history.
4. Types of Credit (10%): A mix of different credit accounts, like credit cards, loans, and lines of credit, can improve your score.
5. New Credit Inquiries (10%): Frequent applications for new credit result in hard inquiries on your report, which can temporarily lower your score.

When you close a credit card, two of these factors—credit utilization and length of credit history—are directly impacted. Let’s break down these effects in more detail.

Impact of Closing a Credit Card on Credit Utilization

Credit utilization, or the amount of available credit that you’re using, has a substantial impact on your score. The lower your utilization rate, the better. Ideally, you want to keep your utilization rate below 30% of your total available credit.

Example: How Closing a Card Affects Utilization

Imagine you have two credit cards:

• Card A: Credit limit of $5,000 with a $1,000 balance.
• Card B: Credit limit of $3,000 with no balance.

Your total available credit is $8,000, and you’re using $1,000 of it, resulting in a utilization rate of 12.5%. If you decide to close Card B, your available credit drops to $5,000, and your utilization rate rises to 20% ($1,000 out of $5,000), assuming you don’t pay down the balance on Card A. This increase in utilization can slightly lower your credit score because it suggests that you’re using a larger portion of your available credit.

In this scenario, keeping Card B open, even if you’re not using it, can help maintain a lower utilization rate, which positively impacts your score.

Impact of Closing a Credit Card on Length of Credit History

The length of your credit history accounts for 15% of your credit score and includes both the age of your oldest account and the average age of all accounts. Older accounts contribute positively, as they reflect a longer track record of managing credit responsibly.

When you close a credit card, the account will eventually fall off your credit report—typically after 10 years—which can shorten your average credit age over time. If the closed card was your oldest account, this can significantly impact your score.

Example: Age of Accounts After Closing

Suppose you have three credit cards:

• Card A: Opened 15 years ago
• Card B: Opened 10 years ago
• Card C: Opened 2 years ago

If you decide to close Card A, your average account age might drop considerably once it’s removed from your credit report. Over time, this reduction in average account age can lower your score, particularly if you don’t have other long-standing accounts to balance it out. Thus, keeping your oldest credit card open is often recommended if maintaining a strong credit score is a priority.

When Does It Make Sense to Close a Credit Card?

Closing a credit card isn’t always detrimental. In some situations, it may make sense to close an account, especially if it helps you manage your finances more effectively. Here are a few cases where closing a card might be beneficial:

High Annual Fees

If you have a credit card with high annual fees that you’re not using regularly, it may be wise to close it. However, consider asking the issuer if they can downgrade the card to a no-fee version instead. Downgrading allows you to keep the account open, preserving your credit history and available credit.

High-Interest Debt

If you’re carrying a balance on multiple cards and struggling with high-interest payments, consolidating your debt and closing a card or two can simplify your financial situation. While this may impact your utilization and credit history, reducing your debt load could be more beneficial in the long term.

Risk of Overspending

If a credit card tempts you to overspend, closing it might help you manage your finances better. Responsible credit management is essential, so if closing a card allows you to avoid accumulating debt, it might be a worthwhile trade-off.

Fraud Concerns or Inactivity

If you rarely use a particular credit card or are concerned about potential fraud, closing the account can provide peace of mind. Cards with inactivity fees or a high risk of unauthorized use may not be worth keeping open if they don’t serve a specific financial purpose.

Alternatives to Closing a Credit Card

If you’re worried about the impact of closing a credit card, consider these alternatives:

Downgrade to a No-Fee Card

Many credit card issuers offer a range of products, some of which come with no annual fees. Contact your issuer to see if they can downgrade your card. This allows you to avoid fees without affecting your credit history or utilization.

Use the Card for Small Purchases

To keep a card active without overspending, consider using it for small, manageable purchases, such as a monthly subscription or grocery runs. Set up automatic payments to ensure the balance is paid off each month, which can also improve your payment history.

Store the Card Safely

If you’re concerned about overspending but don’t want to close the card, consider storing it in a secure place rather than carrying it in your wallet. This way, you can still benefit from the available credit and positive impact on your score without the temptation to spend impulsively.

Common Misconceptions About Closing a Credit Card

Let’s address some common myths surrounding the impact of closing a credit card:

• Myth: Closing a credit card always hurts your credit score.
  Reality: While closing a card can impact your score, the degree varies based on factors like utilization and account age. In some cases, closing a card may have little effect, especially if you have other long-standing accounts.
• Myth: Closing a card will instantly remove its history from my credit report.
  Reality: When you close a credit card, its positive payment history remains on your report for up to 10 years, continuing to benefit your score in the interim.
• Myth: You should never close a credit card.
  Reality: While keeping cards open is generally beneficial, certain circumstances—like high fees or personal spending habits—might justify closing a card.

Managing Credit Cards Wisely

Deciding whether to close a credit card is a personal decision that depends on your financial goals, spending habits, and credit score considerations. If maintaining a high credit score is a priority, keeping older cards open, using credit responsibly, and monitoring your utilization can have positive effects. However, if a card no longer serves you well or incurs unnecessary fees, closing it may still be the right choice for your financial health.

Understanding how credit utilization, account age, and other factors work can help you make informed decisions. Whether you’re building credit from scratch, maintaining an established score, or aiming to improve your financial management, taking a strategic approach to credit cards can support your long-term financial success.