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How Canceling Your Credit Card Could Damage Your Credit

Will canceling credit cards damage your credit?

If you are not using a credit card, should you cancel it? You may have heard conflicting information on this topic. Like many issues surrounding credit, it depends on the situation. However, properly closing a credit card does not automatically damage your credit.

High interest rates, yearly fees, and too much temptation to use a paid off card are good reasons to close a credit card account. However, be sure you understand how closing the account may affect your credit.

Benefits of keeping an unused credit card account open

Even though you are not using a credit card, there are benefits to keeping some accounts open, including:

  • Increased available credit: If you close an account, you lose the available credit on your record. If you have debt on other accounts, losing the available credit can reduce your debt-to-available-credit ratio, which can affect your credit score .
  • Enhanced credit history: An open account in good standing will remain on your credit report indefinitely. You will also increase the length of your credit history on the account. Credit history accounts for 15% of your credit score.

Properly close your accounts for the least affect on your credit score

If you decide to cancel a credit card, you can minimize the effect it will have on your credit.

Closing an account is more than just cutting up your card. When canceling a credit card, you should:

  • Make sure you have a zero balance on the account. (If you pay off a card, unbilled finance charges may appear on the next month's bill.)
  • Wait for your credit report to show the zero balances.
  • Contact your credit card company to find out its procedure for closing an account. (This process may vary from company to company.)

Credit score misconceptions related to closing accounts

There are several myths and misconceptions related to closing credit card accounts and how it affects your credit.

  1. Closing an account erases that account's history from your credit report: A closed credit card account in good standing will not disappear from your credit report when you close the account. Where the confusion surfaces is the fact that you will no longer be adding to the history of the account once it is closed. And, typically in 10 years, closed accounts drop off your credit report .
  2. Credit bureaus penalize you for having too much available credit: This misconception is not true. Too much available credit by itself will not damage your credit. However, your credit score could drop if you open too many new accounts at once.
  3. Whether you close an account or the lender closes the account affects your score: Although your credit report indicates if an account was "closed by consumer" or "closed by creditor," this factor does not have an impact on your credit score.

Weigh your options before making a decision

If you do not use a credit card and it has an annual fee or if you have a credit card with a high percentage rate and have just opened an account with a lower rate, closing your account may be a good idea.

Before you close the account, be sure to weigh the pros and cons of closing the account. If the pros of closing the account outweigh the effect it may have on your credit, it is OK to close a credit card account.

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