There are a lot of reasons why you might want to close a credit card account. Maybe you've found a card with a lower rate or are working to lower your balances and want to get rid of the temptation to make new charges. But before you close your account, it's important to understand how this move can affect your credit score.
Contrary to what you may assume, closing credit card accounts doesn't improve your credit score, but it can have a negative impact. Here's why. Your credit score is based on a number of factors, including:
- The percentage of total available credit
- How much credit you're currently using
- The length of your credit history
- The mix of credit types
If you close an account, your overall available credit is lower. Experts recommend keeping the amount of your total available credit used lower than 20%, so you'd need to cut your credit card spending to make up for the amount of credit you lost when you closed an account to stay within those guidelines.
If you're closing an account because you've made late payments or missed payments, it's important to know that the payment history of that account will still be used to figure your credit score for seven years after the account is closed.
The Do's and Don'ts of Closing a Credit Card Account
If you decide closing an account is a good financial decision, it's wise to have a strategy about which card or cards it makes sense to close and how and when to close them.
- Do pay off any balances you owe before closing the account. Consider closing accounts with high interest rates and fees rather than ones with more favorable terms.
- Don't close several card accounts at once, because it will significantly lower your total available credit and could drag down your credit score.
- Do continue to use your open accounts on a regular basis and try to pay off the balance in full every month. This will help raise your credit score.
- Don't close all your accounts. Even if you're trying not to rely on credit cards, you may need one if an emergency, like a major car repair or healthcare bill, arises. Getting rid of all your cards can also damage your credit score and make it harder to get credit in the future.
- Do consider closing an account if you're not using it and don't plan to do so in the future, especially if you're paying an annual fee for the card.
The Right Way to Close Your Account
You should take several steps if you decide to close your credit card account. First, call the card issuer and let them know you want to close the account and want your record to show that the account was closed at your request.
Follow up by writing to the card issuer to confirm that you are closing the account. After about four to six weeks, check your credit report to make sure that it shows the account as closed and says it was closed at your request. If it doesn't, contact the card issuer again to make sure the account is closed, then notify the three major credit bureaus of the error.