Can Closing a Credit Card Damage Your Credit Score?

Cutting a Card
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By Brian O'Connell

NEW YORK -- Managing a credit card and your credit score at the same time is no easy task -- although that's exactly what consumers have to do on a regular basis, with no shortage of risk to their financial health involved.

"Credit cards are a convenient way for consumers to purchase items now and pay them off over time," said Charles Chung, vice president of consulting and analytics for Experian. "However, if mismanaged, credit cards can get consumers into an unmanageable financial situation that can have a negative effect on their credit rating and as a result, future credit will come at a higher price or they may even be denied credit."

"It's a common fallacy that closing credit cards will always help your credit rating."

One area -- call it a "myth," Chung says -- is when consumers close a credit card, and expect that to mean a subsequent hike in their credit score. "It's a common fallacy that closing credit cards will always help your credit rating," Experian says in a recent study. "Focus more on the amount of available credit being utilized, making sure you are not over extending your debt beyond levels you can manage. Closing good accounts could actually hurt your credit rating."

Of course, where there's a will, there's a way -- and that goes double for consumers looking to close down a card and protect their credit score. First up, know what's at stake when you cut that piece of plastic in half. "Closing a credit card affects two factors used to calculate credit score -- length of credit history, which accounts for 15 percent of your score, and balances -- also known as debt to available credit ratio -- which accounts for 30 percent," says John Janney, past president of the National Financial Awareness Network.

If you need to close a credit card, it's best to close the youngest account with the smallest credit limit to minimize the damage, Janney adds.

"Closing older accounts or accounts with larger credit limits may lower your score, because it makes you look, at least on paper, as if you're new to the credit game and have less credit to work with," Janney says. "My recommendation for someone wanting to close a credit card to is shift balances from the youngest card to the oldest card and close the younger account once its balance reaches zero -- not before. The credit effects may be less harmful, but they will also be temporary."

Also, consider your options -- there is no shortage when it comes to closing a credit card account, experts say.

There may be many reasons why you want to close a credit card, and understanding why will help you make the right decision and avoid hurting your credit, says Alex Matjanec, chief executive officer of MyBankTracker.

"For example, if the issue is your APR is too high, negotiate with your card issuer," he says. "In many cases, they would prefer to lower it and keep you than have to spend money acquiring a new customer. On the other hand, if you have multiple cards and some are costing you money, you may want to consolidate as the hit to your credit score may outweigh the money you are wasting on fees."

The 'Split' Approach

Of course, you could opt for the "split" approach, and cut your card in half but keep the account open. "Closing a credit card could hurt you because it eliminates your payment history," notes William Matthews, a self-described millennial finance adviser located in Houston. "For example, if you have a Visa card for three years and kept a low balance, paid on time, closing that account will wipe out the good payment history which helps give you a higher credit rating."

It's better, Matthews says, to cut the card with scissors but leave the account open. "This gets tricky when you have to pay a membership fee for a card you no longer use," he adds. "[Alternatively] keep the card but only use it once a quarter for groceries or gas just to show activity on the card."

John Schmoll, who runs the personal finance website Frugal Rules, says he has canceled numerous credit cards himself, with minimal to no impact on his credit.

"Both my wife and I have 810-plus scores," Schmoll says, adding that if you have two or more cards from the same issuing bank, ask to transfer the limit you have on the card you'll be canceling to another card. "This is important, as it won't impact your credit utilization ratio," he says. "I've done this every time I've canceled a card and in most instances the entire amount is transferred."

Also, if you want to cancel a card, consider calling your other card issuers and asking them to increase your limit. "If you've been a good customer it's possible they will and thus potentially replace what you're losing and mitigate the impact on your credit," Schmoll adds.

If you're mulling over the notion of closing down a credit card, count to ten first, and consider the right way -- and the wrong way -- to peel away from your plastic. Your credit score will be all the better for it.
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