If you have an unused credit card living your wallet, you may be tempted to snip it into tiny pieces and close your account for good.
But before you run to grab the scissors, it’s a good idea to figure out if closing the account works to your advantage — or if it’ll snip away at your credit record. Hold off on making any hasty moves and read on to avoid a potential negative impact on your credit score.
Common reasons for wanting to close a credit card
Credit card fees can sneak up on you. Especially if the card was issued at a special introductory rate, and imminent fees were buried in the fine print. After a few years of using a credit card, you may get irritated by costs that stack up just to keep it in your wallet. This reason alone may make you want to dispel your credit card from sight, for good.
Divorce or separation
When a couple separates, it’s common and often recommended to untangle from joined financial assets. So, you and your partner share a credit account, it’s possible you’d want to separate yourself from the other’s spending habits.
Credit card debt is a serious issue that creates hardships for countless individuals and families. Spending on credit is easy, but many who go into debt don’t realize that, with interest and fees, paying it back can be an exceedingly hard uphill battle. As such, some may want to remove the temptation of a credit line altogether.
How closing a credit card affects your credit score
Like most things in life, what’s sunshine for some is rain and clouds for another. The same goes for closing credit cards and the impact on individual credit scores.
There are two main things to take into account when you’re closing a credit card that affects your credit score: length of credit history and credit utilization.
Length of credit history
Your length of credit history makes up 15% of the weight of your credit score. The more mature your accounts, the greater your potential for a higher score. If you were to close your oldest account, it would shorten the window into your credit history, potentially lowering your score.
Your credit utilization is the second most important segment of all the credit score influencers, making up a stout 30% of the total impact to your credit score. Let’s look at an example of what may happen if you toy with your credit utilization by closing an account.
You have two credit cards open and are looking to close one. Card A has a $3,000 balance and a $6,000 limit. Card B has a $0 balance and a $4,500 limit. Together, you’re carrying a $3,000 balance with a $10,500 credit limit. That comes out to a 28.5% credit utilization rate.
For context, it’s recommended that you try to keep your credit utilization rate under 30%. Following this rule can also do wonders for your credit score.
If you close Card B, your credit limit would reduce to $6,000. And that would increase your credit utilization rate to a whopping 50%. It would almost undoubtedly make your score sink significantly, too.
When to close an unused credit card
There are times where closing an unused credit card may be in your best interest or won’t even harm your credit score.
If you have a few credit card accounts, and the one you’re looking to close is your newest account, closing the card usually won’t affect the age of your credit history. Moreover, if you have very little debt across all accounts, and closing one card doesn’t affect your overall credit utilization, you may not have any negative impacts on your credit score when you close an account. (Just make sure your credit utilization is under 30%!)
And if your credit card has unaffordable annual fees or excessive interest, it may be in your best interest to simply close the account.
But not so fast! Here’s another thing to consider: Are you are a problem shopper or do you have a tough time managing your money and credit line? If so, it may be best to get your spending under control and work to sharpen your money handling skills.
But if a large unused amount of credit keeps getting you into financial trouble or is too much of a temptation, you may want to close the account and reopen a card when you have better spending habits — even if it dings your credit score. This case is a last resort and should be weighed carefully, and as such, we recommend speaking with a financial advisor.
How to safely close a credit card
If you’ve weighed the pros and cons and decide it’s in your best interest to close a credit card, here are the steps you should take that’ll help minimize your risk.
1. Redeem cash back or points you’ve racked up.
Once you close the account, you can likely say sayonara to any benefits tethered to your account. Redeem any miles, points, or cashback you’ve attained.
2. Make arrangements with authorized users.
If anyone else is attached to the account, be sure to inform them to stop making purchases and prepare for other payment arrangements.
3. Turn off or switch over automatic payments.
To ensure that you don’t get into trouble or sent to collections for stopped automatic payments, review all automatic payments on the account and switch them over to an open account.
4. Pay off or transfer your balance.
Pay off your entire balance or transfer the amount you owe to a new credit card.
5. Contact your credit card company to confirm your clear balance.
Just because you paid your balance doesn’t mean you won’t be hit with a surprise interest fee. After you pay down or transfer your balance, call your creditor to ensure that there won’t be any additional payments.
6. Close the account.
After confirming a zero balance, request the account be closed.
7. Safely get rid of your card.
It’s time to finally grab that pair of scissors. Or better yet, enlist in a heavy-duty shredder.