Can Closing a Credit Card Hurt My Credit Score? A Comprehensive Guide

Navigating the world of credit can be tricky. If you're considering closing out a redundant credit card, it's important we discuss how this decision might affect your financial health. One question on a lot of people's minds is, "Can closing a credit card hurt my credit score?" Let's dig into this issue in detail.

Understanding Your Credit Score

Your FICO and VantageScore, commonly known as your credit scores, are numerical representations of your creditworthiness. These scores reflect your financial reputation and can influence everything from loan approvals to rental applications.

Does Closing a Credit Card Hurt Your Credit Score?

Short answer, yes. Closing a credit card can indeed impact your credit score negatively. It happens due to a few factors related to your credit utilization ratio and the age of your accounts, which we'll discuss in the following sections.

The Impact on Your Credit Utilization Ratio

Your credit utilization ratio makes up about 30% of your total score - it's the ratio of your total credit usage to the total available credit you have. For example, if you have two credit cards, each with a $2,000 limit, your total available credit is $4,000. If you’re utilizing $2,000 of that total credit, your credit utilization ratio is 50%.

When you close a credit card, you reduce your total available credit. Using the same example, if you closed one card, your total available credit falls to $2,000, and your utilization ratio climbs to 100% — even though you haven't charged anything extra. This spike in utilization percentage can cause your credit score to drop.

Effect on the Age of Your Credit Accounts

Your credit age or history constitutes about 15% of your credit score. It's basically the average age of all your credit accounts combined. Closing an old credit card, especially if it’s your oldest account, can decrease your average credit age and possibly bring down your credit score.

The Fallout of Losing Payment History

Your payment history is responsible for 35% of your total credit score. Once you close an account, eventually that credit card account and all your on-time payments will drop off your credit report, usually after about 10 years, thereby having a potential negative impact on your score.

Hard Inquiries on Your Credit Report

If closing a credit card pushes you to open new lines of credit to compensate for lost available credit, you risk racking up new hard inquiries on your credit report, which could further lower your score.

Good Reasons to Close a Credit Card

Notwithstanding, there may be good reasons to close a credit card. If a card has high fees or a high-interest rate, it might make financial sense to close that account. And if a card tempts you into unnecessary spending, it might be smart to remove that temptation.

The Right Way to Close a Credit Card

If you decide that closing a card is the right move for you, consider first paying off your balances on other cards to maintain a lower utilization rate. It may also be helpful to open a new credit card with better terms before you close the old one, but remember to keep your credit utilization low on the new card.

Parting Thoughts

So, can closing a credit card hurt your credit score? Yes, it most certainly can. The impact primarily revolves around the parameters of credit utilization, payment history, and credit age. While we've primarily addressed the drawbacks of closing a credit card, remember that each financial situation is unique. The key lies in understanding your financial needs and wisely managing your credit portfolio.