How Does Canceling a Credit Card Affect Your Credit Score?

We've covered how to decide if you should cancel a credit card in the past, but what happens to your credit score when you cancel a credit card?

TLDR: I don't recommend closing a credit card unless you're paying fees and getting negative expected value.

If you are getting negative expected value from an annual fee credit card, I recommend:

  1. See if you can get a good retention offer to keep the card
  2. Ask the credit issuer if they can waive the annual fee
  3. If not, then see if there's a no annual fee product change route
  4. Cancel the card

Once you build out a foundation of 5-10 cards, then it's safe to cancel a credit card because you have a strong base.

On a side note, one frequently asked question we get is, "does cancel or closing a credit card get me under the Chase 5/24 rule?" No. As long as you opened a new credit card from any credit issuer, it will still count towards 5/24. Closing the account doesn't do anything.

What happens when you cancel/close a credit card?

In the short term, nothing terrible happens. 

In the long term, closing an account will impact:

  1. Payment history
  2. Utilization

Payment History

The closed account will still show up on your credit report for 7-10 years. Assuming that you paid your balances in full each month and you have good payment history, it will continue to show on your credit report until the account falls off. 

After 7-10 years, the payment history from the closed account will disappear from your credit report. For example, if the closed account was five years old, then you would lose five years of payment history when the account falls off.  

Payment history consists of the total number of payments divided by the total number of on-time payments. 

By having more accounts, it's more forgiving if you miss a payment.  

Payment history = on-time payments / total payments

Grading:

  • 100% = Excellent
  • 99% = Good
  • 98% = Fair
  • 97% = Poor
  • <97% = Very Poor 

Example:

  • 2 on-time / 3 total payments = 66%

Example 2:

  • 999 / 1,000 = 99.9%

The more on-time payments you have, the more forgiving a late payment will be.

Utilization

Utilization is how much credit limit you're using out of the total issued credit limit. A higher utilization number is worse because it's seen as high-risk behavior. Anything above 50% utilization is seen as risky.

Utilization = credit limit used / total credit limit

Grading:

  • 0-9% = Excellent
  • 10-29% = Good
  • 30-49% = Fair
  • 50-74% = Poor
  • 75%+ = Very Poor 

If you close a credit card, it will hurt your score in the short-term because it will increase your utilization. For example, if you have a $1,000 total credit limit across all your cards, and you only spend $100, then you're at 10% utilization. 

Example 1:

  • $100 statement balance / $1,000 total limit = 10% utilization = Good

When you close a credit card, the credit limit is lowered. In the example above, let's say that the closed account had a $500 credit limit. If you spend $100 and your total credit limit is now $500, then the utilization has increased to 20%.

Example 2:

  • $100 / $500 = 20% = (still) "Good"

The impact of closing a card will depend on how many credit cards you have, and what the credit limits are. 

In the long-term, closing an account won't really affect utilization because you're most likely going to replace it with another account in the future. 

Average Age of Accounts

In the short term, the average age of accounts won't be affected because the closed account will remain on your credit report for 7-10 years, depending on the issuer.

In the long term, after the account falls off, you lose the account history. 

Total Number of Accounts

In the short term, the total number of accounts won't be affected because the closed account will remain on your credit report for 7-10 years, depending on the issuer.

In the long term, after the account falls off, it won't count. 

Other credit factors:

Credit Mix

  • Short-term = Immaterial impact

  • Long-term = Immaterial impact

Inquiries

  • Short-term = No impact
  • Long-term = No impact

FAQ

Q: What happens when you close an account that has negative payment history?

Negative history stays on your account for up to 7-10 years, even if you pay off the balance. 

Q: What should you do if you have no annual fee cards that you don't use anymore?

If you have a strong 5-10 card base, I recommend keeping the oldest cards. Maybe cancel the cards that are middle-new that you don't get value from, but I recommend keeping them open since they help your credit. 

You can also lower the credit limits of the sock drawer cards so it doesn't look like you're over extended for credit limit.