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Pros and Cons of Closing Credit Cards
Credit cards can be convenient for making purchases and some can even yield valuable rewards. But if you’re not using a particular card as often or you no longer wish to pay an annual fee to keep it, you might consider closing down the account.
Closing credit cards can have both pros and cons, particularly where your credit scores are concerned. It’s important to weigh both in the balance before making a move.
Pros of Closing Credit Card Accounts
First, let’s take a look at the potential benefits of closing one or more credit card accounts.
1. Fewer cards means less to manage
Closing credit card accounts can help you simplify your financial life. Instead of carrying around a wallet full of cards, you could pare down to just one or two.
- Fewer monthly billing statements to review
- Fewer monthly payments to make
- Less confusion over earning and redeeming credit card rewards
Fewer cards could also make it easier to keep up with what you’re spending each month, which could be a good thing for your budget.
2. Less opportunity to go into debt
Another positive side effect of having fewer credit cards is that there’s less room for you to create debt.
If you have several open accounts with zero balances, it may be tempting to use them to spend. By limiting your card options, you also limit the amount of available credit you have to make purchases against.
3. Credit score impacts may be minimal
Closing credit card accounts can impact your credit scores, something we’ll dig into on the cons side. But the scale of the impact may depend on the age and limit of the credit card in question.
Closing a newer account, for example, or one with a smaller credit limit may not affect you as much as closing one of your oldest credit cards.
4. You could save money
Keeping a credit card that has an annual fee can make sense if you’re using it to earn generous rewards or take advantage of other valuable benefits. But if you have a card that’s sitting dormant, closing it allows you to avoid paying that fee. Getting rid of a card that charges a higher APR could also be a good move if you carry a balance month to month and want to save on interest.
Cons of Closing Credit Accounts
Now that you know what can be good about closing credit cards, let’s review the potential downsides.
1. It could hurt your credit utilization ratio
Credit utilization refers to the percentage of your credit limit you’re using at any given time. The wider the gap is between your credit card balances and your credit limits, the better for your credit score.
Closing a credit card eliminates that card’s limit from your credit utilization calculations. If you have high balances on some of your other cards, that could result in a higher credit utilization ratio and cost you credit score points.
2. Credit age may be affected
Credit age plays a part in credit score calculations. As a general rule, older accounts can help your credit score since they demonstrate a longer history of using credit.
Shutting down your oldest credit card accounts could negatively impact your average credit age. A shorter credit age could result in the loss of credit score points.
3. Rewards may go to waste
Earning points, miles or cash back can save you money if you’re able to apply those rewards to travel, other purchases or savings. Some credit cards allow you to keep your rewards and continue redeeming them after you close your account but others may not.
If closing a credit card means losing rewards you may first want to consider how you can redeem them. Otherwise, you might be letting them slip through your fingers.
4. You’re not creating new payment history
Payment history is important for FICO credit scoring. Paying credit cards on time is one of the best ways to improve your credit score.
If you close down credit card accounts, you don’t have the opportunity to build credit via on-time payments. While some credit scoring models now include alternative data, such as rental or utility payments, not all of them do. So going cold turkey with credit cards altogether could stunt your credit score’s growth.
The Bottom Line
Closing credit card accounts may seem like a good idea but it could do more harm than good to your credit score. Before you close a credit card, consider how it may affect your credit age and utilization ratio. And if your main reason for closing the card is the annual fee or APR, consider reaching out to the credit card company to see if they might be willing to negotiate a better deal to keep you as a customer.
Rebecca Lake is a freelance writer specializing in personal finance, credit and debt. She’s a contributor to U.S. News and World Report, Forbes Advisor and The Balance and her work has appeared online at CreditCards.com, MyBankTracker, Money-Rates.com and dozens of other top publications.