Canceling a credit card could be good or bad depending on your spending habits, current credit utilization, and the diversity of your credit profile.
If closing a card will cause your credit utilization to rise significantly or lower the diversity of your credit account, it can hurt your credit and therefore finances. If you are struggling with overspending with your credit card, then it may be helpful.
However, both of these scenarios may occur at the same time. That’s why it is extremely important to carefully consider the pros and cons before choosing to cancel your card.
Many Americans struggle every year to pay off their credit cards. According to TransUnion, the average credit card balance for an American consumer in 2023 (Q2) was $5,947.1 How does your credit card usage stack up against this? And if you’re struggling with debt like credit cards, payday loans, or personal loans, is canceling a credit card a bad move? CreditNinja wants to help you find the answers.
The world of credit scores can seem complicated at times. Knowing how all of your past credit and borrowing habits affect you can also be complicated. But with credit cards, it’s usually fairly simple: less credit card usage and debt is a good thing for your credit score.
Pros and Cons of Canceling a Credit Card
There’s a lot to consider when deciding whether to cancel a credit card, or leave it open. Check out the following list of pros and cons to help you decide what’s right for you:
Pros of Closing a Credit Card
- Having less credit cards open and available to you will mean less spending. If you aren’t spending money on credit cards, then you will likely have less debt overall.
- Closing your unused credit card can help to avoid fraudulent charges in the future.
- Closing credit cards you’re not using may help you organize your finances better, and make it easier to track spending and payments.
Cons of Closing a Credit Card
- Canceling a credit card will lower available credit, thus increasing your “credit utilization ratio.” This is the ratio between your available credit and debt. Your credit score will benefit from a credit utilization ratio below 30%. This means you’re only using less than 30% of the credit available to you.
- Keeping a credit card open may help you with emergencies like a broken down vehicle, or other unexpected bills.
- On time payments with your credit card can help you build credit history, although there are definitely ways to build credit without credit cards!
Leave It Open with a Zero Balance
For anyone interested in improving their credit score, there are several important things to remember. Your credit score is calculated based on a few key factors:
| Credit Score Factors | Description |
| Payment History | Reflects how consistently you’ve made payments on time for credit accounts. |
| Amount/Debts Owed | Represents the total amount of debt you currently owe across all credit accounts. |
| Length of Credit History | Evaluates the duration of your borrowing/average age of your accounts and payment history over time. |
| New Credit | Considers the presence of any new or recent loans or credit card accounts. |
| Credit Mix | Weighs the variety of credit types in your overall financial profile. |
Your score can be heavily influenced by how much credit you’re using, compared to how much is available to you. This is called your “credit card utilization ratio.” It’s simply the percentage of your available credit that you’re actually using.
Having a low credit utilization ratio will help to lower your overall credit score. This means that if you have a credit card with a zero balance, keeping it open and not using it could benefit you.
FAQS: Can Canceling a Credit Card Hurt Your Finances and Credit Scores?
The your credit utilization ratio represents the percentage of your available credit limit that you’re currently using, a credit card utilization ratio deals specifically with your credit card. Credit utilization ratio is a significant factor in determining your credit score.
Closing a credit card can reduce the length of your credit history on your credit reports. However, accounts with a history of on-time payments can remain on your credit reports/a part of your credit history for up to 10 years.
Yes, closing a credit card can potentially hurt your credit score, especially if it’s an older account or if it significantly affects your credit utilization ratio. Both your credit utilization ratio and age of accounts have impacts on your credit score.
After receiving confirmation of the closure, shred or securely dispose of the physical card.
The terms are often used interchangeably. However, the company generally refers to the brand (e.g., Visa, MasterCard), while the credit card issuer is the financial institution that provides the card and sets its terms (e.g., Bank of America, Chase).
Consider factors like the age of each account, annual fee amount, interest rates, and benefits. Closing newer accounts with high annual fees might be less impactful than closing older, established accounts.
While there’s usually no fee for closing a card, ensure you’ve paid off any outstanding balance or transferred it. Also, if the card has an annual fee, you might be eligible for a prorated refund.
Closing a card doesn’t erase any debt on that card. You’ll still need to pay off the balance. However, it can prevent further spending on that card.
Policies vary by issuer. Some may allow you to reopen a closed account, while others might require you to apply for a new card.
Older credit card accounts contribute more to the length of your credit history. Closing older cards might have a more significant impact on your credit score.
Canceling a card terminates the credit card account, while freezing your credit report restricts access to it, preventing new accounts from being opened in your name.
Depending on the credit card issuer’s policy, you might lose any accumulated rewards or points upon cancellation. It’s essential to redeem them or check the policy before closing the account.
A zero balance is generally better, but maintaining a low utilization ratio (below 30% of your credit limit) can also positively impact your credit score.
It’s a good practice to review your credit cards annually, considering factors like fees, interest rates, and your spending habits.
Most credit card issuers have customer service lines or online portals where you can raise concerns, ask questions, or initiate account changes.
Conclusion With CreditNinja: Canceling Unused Credit Cards
It makes sense that if you aren’t using a credit card, or don’t need it, that you would cancel it. This may seem like the logical choice. Why keep a credit card open if you aren’t planning to use it?
But as mentioned above, there are good reasons to leave it open. That being said, if you don’t think that you’ll be able to resist the urge to use it, then it may still be a good idea to cancel your credit card. Canceling a credit card may be the right choice for you, at least until you are able to learn better budgeting and spending habits.
At CreditNinja, we recommend keeping these cards open—as long as you can use your credit cards wisely. Learn more about topics like spending, budgeting, and credit cards in the CreditNinja Dojo!
References:
- What’s the Average Amount of Credit Card Debt in the U.S. | U.S. News
- Credit Card Debt in 2021: Balances Slightly Decline | Experian
- How are FICO Scores Calculated? | myFICO
- What is a Credit Utilization Ratio? | Experian
