The Real Costs Of Closing A Credit Card

There’s a ton of conflicting wisdom about when to close a credit card, or if you should do it at all. Some will say it's fine based on their own personal situation, while others will tell you "never!" out of an abundance of caution.

While there are some good rules of thumb to follow, you'll want to take into consideration how doing so might affect you — and not what it did or didn't do for someone else. The reason: Closing a credit card is one of the most immediate ways to impact your credit score, which can impact your ability to get a loan for a car, a home, or even buy a new phone or rent an apartment, so you want to think about what's best for you.

Here are a few things to keep in mind.

Closing a credit card will be a bigger deal if you have fewer lines of credit, so you'll want to be very careful. Priya Malani, a partner at Stash Wealth, says that she typically advises clients to have no more than three cards open.

"Part of this is because it’s easier to keep track of and spot fraud," she says. "[But] having a few cards — more than one — is good for your credit utilization ratio (CUR), which is a major factor of your credit score."

Your CUR is calculated by looking at the amount of credit you're using, and dividing it by the amount of credit that is available to you. For example, if you have three credit cards with a cumulative limit of $10,000 and you've charged a total of $3,000 across your cards, your CUR is 30%.

Malani says that having a CUR under 30% is healthy — "the lower your CUR, the better," but there is some wiggle room, adds Liz Weston, CFP, a columnist at Nerdwallet and the author of Your Credit Score: How to Improve the Three-Digit Number That Shapes Your Financial Future.

"In general, the less of your credit you're using, the better," she says. "So, 30% or less is good, 20% or less is better, 10% or less is best, [but] it's not like if you do 31%, it's horrible and 30% is fine."

So this is one area where having multiple cards might be beneficial: If you have a large balance spread out among a few cards (for example, one with a lower or temporarily no interest rate), you might have an easier time paying it down. Or, if you want to take a big trip, Weston adds, spreading the cost over several different cards and paying them off in full is another way to keep your credit utilization down so that your scores can continue to grow.

If you haven't yet gone on this route, don't. If you already have, pay it down as soon as possible and then consider closing it farther down the line, Malani advises.

"We don’t really like clients to open store cards unless they are making a large enough purchase to really warrant the discount, like buying a sofa," she says. "Don’t open a [store] card to save $25 on a $250 purchase [because] you’ll spend all the savings and more with their marketing gimmicks."

Not only do store cards have high interest rates, she notes, but they constantly market to their cardholders, making it incredibly tempting to go wild shopping for "bargains," when you might not have done that if you didn't have the card at all.

A store credit card is sometimes the first credit card that many people have, making things even more confusing. The shorter your credit history is, the bigger the impact you'll face closing your longest line of credit — but if you do, it doesn't mean you're doomed.

"Credit history is the third-largest component of your credit score and definitely an important one, so keeping your oldest credit card open is a good idea," Malani says. "But if the card isn’t beneficial to you, meaning it has a high annual fee or a balance on it that’s stuck at a high-interest rate, it’s definitely advantageous to consider rolling the balance to a newer card and closing the old account."

Yes, you may experience a temporary blip on your credit score, but it will even out over time, especially if you have healthy credit card habits, like paying your bill on time, she explains.

The only time you’d want to refrain from closing a card? When applying for a mortgage or other large loan.

"In general, you don't want to close accounts if you are trying to improve your scores," Weston says — and a big moment when people want their scores to look their shiny best is during the home-buying process. "Once your scores are high, go ahead get rid of it if you're not using it. But while you're still improving your score, you want to make sure that those accounts stay open."

Closing a card doesn’t have an absolute effect on your credit score, Malani says. Your credit score is made up of a variety of components, the three biggest being: payment accountability, CUR, and your credit history — in that order.

One of easiest FICO-improvement tricks in the book is to pay your credit card more often — not closing a card entirely.

"Start paying your bill off every week or two weeks instead of every month and you’ll see your credit score go up," Malani advises. "This way you won’t have to worry about that temporary hiccup from closing a card."

Malani says that negative marks on your credit report usually stick around for seven years, but Weston adds that closing a card won't make it go away any faster.

"I've talked to people who think that if they closed an account all the negative stuff on that account would go away, but it does not work that way and can really backfire on you."

If you want to be done with an account once and for all, but are worried about the effect on your credit score lingering, look toward a few tools to help you assess the damage first — and then monitor your actions moving forward. One of Malani's favorite apps is CreditWise from CapitalOne, a free tool that lets you see how different actions may impact your credit score.

If you're not ready to shut it down just yet, Weston advises that you maintain alerts on a card — even after it is paid off — to see if any suspicious charges are being made. You could do that directly through the card institution's email notifications, or through an account aggregator like Mint, she says. In the meantime, be patient — even if the worst happens.

"The laws around credit card fraud are so pro-consumer that you really don't have to worry about it," she says. "Once you discover it and you report it, it's going to be taken care of. You still want to be responsible and try to keep track of what's going on with your old accounts, but really it's kind of the issuer's problem at that point."

Finally, if you do decide to close a credit card, make sure you follow through correctly. You might cut up a card to avoid temptation, but that doesn't actually do anything on the bank's side. You actually have to call your card issuer and request that it be closed, Malani says.

"Losing the credit line from closing a card can be made up by requesting a credit line increase on open cards," she notes. (Just don't undo all of your progress by charging your credit extension to the max!)

Before you commit to closing, redeem any lingering rewards or points (you bought things to get them, after all). Then, once you've finished, request written confirmation that your card was closed, and then review your credit report after a few weeks to double-check that it was done. Malani suggests pulling your report for free once a year at AnnualCreditReport.com.