Closing credit card? Here's how it impacts your credit score
What's the story
As the year draws to a close, many people consider closing one or more of their credit cards. The reasons for this decision can vary from getting a new card with better features to dissatisfaction with changes made by the bank. However, it's important to understand how closing a credit card can affect your credit score and whether you should be worried about it.
Closure motives
Reasons for closing credit cards
People close their credit cards for a variety of reasons. These include getting a new card with better features and benefits, dissatisfaction with significant changes or devaluation of existing card features by the bank, or an increase in fees that makes the card less valuable. Understanding these reasons can help you make informed decisions about your credit cards.
Analysis
How closing a card affects your score
Closing a credit card can lead to a slight decrease in your credit score. This is mainly due to changes in the credit mix, which is one of the factors considered while calculating an individual's score. A healthy mix of secured loans (like home or vehicle loans) and unsecured loans (like personal loans or credit cards) contributes positively toward improving one's score.
Score mitigation
Recommendations for minimizing impact
To minimize the impact on your credit score when closing a card, ensure that there is no or minimal effect on your credit mix. This way, any slight decrease in your score will be temporary. If you're closing an old card that's free for life, consider keeping it instead of closing it.
Utilization impact
Increase in credit utilization ratio
The credit utilization ratio measures how much of your total credit limit you're using. A ratio of 30% or less is good for your score. But if you close a card and move all your spending to another card with a lower limit, it can raise this ratio above 30%. This increase can negatively impact your score. Before closing a card, check its effect on this ratio and consider requesting a limit increase on the remaining card if necessary.
Early impact
New-to-credit customers
For new-to-credit customers, it usually takes six months to a year to build a decent score with a loan or regular monthly credit card usage. If such a customer closes their first card in less than six months, it can halt progress in building their score and history. Therefore, it's recommended that these customers use the card for at least a year before considering closure.