Is closing credit cards hurting your credit score?

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I wrote about the common misconception that applying for credit cards hurts your credit score.

While it’s true that investigating your credit report can lower your score by a few points in the short term, in reality several metrics can be positively affected by opening new credit cards, including lower usage. credit and a longer payment history.

What matters most is that you don’t overuse your credit, make your payments on time, and maintain a decent average age of your credit card accounts.

In this post I wanted to answer another question that I get all the time – How does closing credit cards impact your credit score?

Although I have almost 30 credit cards right now, I sometimes open and close cards as my spending habits change over time, as does the value proposition of some credit cards. Let’s take a closer look at the impact on your credit score when you close cards.

How is your credit score calculated?

For some background, let me first post a quick refresher on how your credit score is calculated (if you already know that, definitely skip this section). Your credit score is made up of the following:

  • 35% of your score is your payment history (the percentage of payments you made on time)
  • 30% of your score is your credit usage (the amount of credit you use compared to your total limits)
  • 15% of your score is your credit age (the average age of your open accounts)
  • 10% of your score corresponds to the types of credit you use (how many different types of credit applications you have)
  • 10% of your score corresponds to your requests for new credit (how many times you have requested credit)

Your conclusion here should be that if you make your payments on time, don’t overuse your credit, and keep your average account age fairly old, that’s 80% of your credit score.

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What is the impact on your credit when you close a credit card?

When you open a card, you’ll receive a request which counts as a small “ding” on your credit score (although it may go up due to other factors). There is no such thing when you close a map.

When you close a credit card, your credit rating is potentially affected in several ways.

Your credit usage may increase when you close cards

When you close a credit card, your credit usage may increase. Your credit usage is calculated based on your overall available credit. So when you close a card, your overall available credit decreases.

Let’s use the following example:

  • A person has two credit cards, each with a $5,000 line of credit, for a total of $10,000 of available credit
  • This person spends an average of $3,000 a month on their credit cards

If both cards are open, that person’s average usage would be 30%. However, if the total available credit is suddenly $5,000 (due to a card closure), that person’s card usage rate will double to 60%.

There are several ways to mitigate the impact:

  • You can pay your balance before the statement closing date; this is because your usage is calculated based on your balance on the statement closing date
  • When you close your card, you can try to transfer your line of credit to another card, in order to keep the same overall amount of credit; this is only possible if you have another card with the same issuer and are transferring person-to-person or business-to-business (even then this is not always possible)

What happens to the average age of your accounts when you close cards?

A common point of confusion is what happens to the average age of your accounts when you close a card. The reality is that this metric could be affected in the long run, but when you close a credit card, it continues to show up on your credit report (and continues to age) until it drops after 10 years. .

Let’s use the following example:

  • A person has two credit cards
  • One credit card has been open for two years and another credit card has been open for four years, which means that the current average age of this person’s account is three years

If you were to cancel the card you’ve had for two years, what would be the average age of your accounts in two years?

  • A map would be six years old
  • A card would be four years old (the closed card continues to accumulate age, even during the two years since it was closed)

This means that your average age is now five years old, which is better than before. At some point (up to 10 years after the card is closed) it will fall out of your account and no longer contribute to the average age of your accounts, but this is not immediate.

Try to keep the average age of your card accounts high

Example: how I am not very impacted by the closing of the cards

Now let me use my situation as an example:

  • I have nearly 30 credit cards
  • I have lots of available credit and usually pay off my balance before the statement closes, so my usage is only 1%
  • The average age of my account is six years and six months

For more context, here are some of my credit factors:

In my case, I have a sufficiently established history that opening or closing a card has a very minimal impact on my credit score.

One thing that has really helped me is that I have a few very old cards, including one that has been in my credit history for 33 years (see this article to find out how this is possible). I expect that if I close this map it will negatively impact my score in the long run, once it eventually disappears from my report.

Strategies to minimize the impact of closing credit cards

While there’s no magic formula here, in general, I do have a few takeaways and recommendations:

  • Hope this demonstrates the value of keeping some cards with no annual fee for a long time, as it can really help your credit score.
  • In the event that you no longer benefit from a card that you have had for a long time, call and see if it is possible to downgrade it to a card with no annual fee, so that you can at least keep it. your credit file
  • When you cancel a card, see if it’s possible to transfer the line of credit to another card you have, which can also help keep your credit usage low.
  • If you will be heavily impacted by increased credit usage, pay most of your credit card bill before the statement closes, as this will indicate very low usage this way.
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At the end of the line

As a general rule, you shouldn’t be afraid to close credit cards as part of a well-rounded strategy. The key is to make sure that canceling a card won’t dramatically increase your credit usage (although you can partly get around that by paying off your balance before the statement even closes).

If you’ve owned a card for a long time, there’s potentially a lot of value in keeping it. You can always call the credit card company and see what downgrade options are available to you.

If you’re relatively new to credit cards, that’s also why it’s so important to get lucrative cards with no annual fee early on in your credit journey, so they can help boost your score. long-term credit. After all, maximizing credit card rewards is a marathon, not a race.

What has been your experience with the impact of closing credit cards on your credit score?

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