Ever since the financial crisis in 2008, and the resultant recession, there has been a renewed interest in canceling credit cards and getting out of debt. Additionally, the upswing in fees from many credit card issuers has prompted some to want to cancel credit cards in order to avoid those fees. Many card issuers are instituting annual fees, leading even the most responsible and conscientious card users to feel the costs of credit card spending.
However, just because it’s tempting to cancel your credit card, doesn’t mean it’s always a good idea. Before you cancel your card, consider the effect that a cancellation could have on your credit score.
How Canceling a Credit Card Affects Your Credit Score
The point of your credit score is to measure how you use credit. The entire system is set up to encourage credit card use. So, when you cancel your credit card, you could be penalized. It is important to understand this before you make your move. Some of the ways that a canceled credit card affects your credit score include:
Debt to available credit ratio: The second-most important factor of your credit score (behind your payment history) is how much of your available credit you are using. When you cancel a credit card, you immediately reduce the amount of available credit you have. If you still have balances on other credit cards, canceling a credit card can be especially damaging.
- Length of credit history: After your debt to available balance ratio, the next important factor is the length of your credit history. Your score considers the average amount all of your credit accounts have been open. If you cancel a credit card, especially one that you have had for a long time, you bring down the average.
- Credit types: It’s not a terribly important factor in your score, but it does have an impact — the types of credit you have matter. You do better, in terms of credit score, if you have a mix of revolving and installment accounts. If you cancel a card that represents one of a limited number of revolving accounts, that can be damaging. Also, a major card issuer “counts” for more than a department store card. Keep that in mind before you cancel a card.
When Is the Best Time to Cancel a Credit Card?
The best time to cancel a credit card is when you aren’t planning to apply for new credit. If you know you won’t be applying for a home loan or a car loan anytime within the next six to nine months, it might be worth it to cancel a card. It can also help to wait to cancel until you have paid down a little more of your debt. If you have most of your debt paid off, canceling one card, and still having available credit elsewhere, can help cushion your credit score. Of course, after a few months, your credit score will recover.
When deciding which card to cancel, try to choose one that will have minimal impact. A card with a lower limit, and one that hasn’t been opened too long is idea. However, if you are closing an account because of new, higher fees, those considerations may not matter so much. Maintaining a slightly higher score probably isn’t worth the fees you are paying.