Should I Close My Credit Card After I Pay It Off?
Closing a credit card could harm your credit score, so there's a bit of strategy that goes into determining whether you should close one.
Contributing Writer at Tally
November 23, 2021
Imagine the following — while in school, you opened a few credit card accounts to help pay the bills. After graduation, you pay down the debt on these cards. It takes a bit of patience and diligence, but you finally get it done.
Now what? You ask yourself, "Should I close my credit cards or keep them open, even though I'm not going to be using them?"
Whether you leave the account open or closed can impact your credit score, so we’ll explain if you should close your old credit card accounts and answer other frequently asked questions you may have.
Should I close my credit card?
Before answering this question, it's important to understand the factors that go into your credit score.
There are two types of credit scores:
Both take the information on your credit report and boil it down into a three-digit number. Lenders use this to determine your creditworthiness or whether they should let you borrow money. Typically, the higher your credit score, the more creditworthy you are.
FICO Scores are calculated based on the following:
35% = your payment history
30% = amount of debt you owe
15% = your length of credit history
10% = your credit mix
10% = new credit
VantageScore doesn't put exact percentages to its factors but defines them based on the following:
Extremely influential = total credit usage, balance and available credit
Highly influential = credit mix and experience
Moderately influential = payment history
Less influential = age of credit history
Less influential = new accounts opened
When you close an account, your credit utilization ratio will increase if you have outstanding debts on other accounts. Your credit utilization ratio measures the amount of credit you’re using compared to your total available credit.
For instance, say you have three credit cards, each with a $5,000 credit limit. You have $3,000 in debt. Your credit utilization ratio is $3,000 divided by $15,000, or 20%.
Now, let's say you close an account. Your credit utilization ratio is now $3,000 divided by $10,000, or 30%. The higher your credit utilization rate, the more it will have a negative impact on your credit. So, closing your account could have a negative impact on your credit score if you have outstanding credit card debt on other accounts.
A closed account could also have a negative impact on your credit score if you are closing your oldest credit card. Both FICO and VantageScore consider the length of your credit history when calculating your score. Essentially, the longer you have the card, the more it demonstrates to lenders that you can manage your personal finances responsibly. By closing your oldest account, your length of credit history will decrease.
Are there other considerations to think about when deciding to close?
The impact on your credit score is certainly something to think about, but it's not the only thing. There are a couple of other factors you may want to consider when deciding whether you should close a credit card.
Whether you have outstanding rewards
If you have a rewards credit card that offers perks like cash back, you may want to use these rewards before you close the account, as your credit card issuer won’t let you use them once the account is closed. You can often use the cash back as a statement credit, or you may be able to redeem it for travel credit.
Whether you have an annual fee on the card
Some credit cards come with an annual fee. You’ll typically see high annual fees on the best credit cards, which offer perks like cash-back rewards and prime interest rates. If you have a card with an annual fee that you’re no longer using, you may want to close that card. Otherwise, you’ll be paying money to your credit card company unnecessarily.
Whether you’re going to open a new credit card or apply for a loan
Your lender will perform a hard inquiry on your credit report when you open a new credit account. This may lower your score temporarily. If you’re going to open a new credit card and close an old one, open the new one first. That way, your credit score is as high as possible when the lender looks at your credit report.
If possible, you should also avoid opening or closing credit cards if you’re preparing to apply for a loan.
For instance, let's say you’re taking out student loans for grad school or applying for a mortgage. You want to demonstrate a good credit score. The hard inquiry on your account from opening a new card — or the decrease in your score from closing a card — could make you seem less desirable to lenders. This, in turn, could result in you having to pay a higher interest rate.
Are there alternatives to closing an account?
Just because you have paid off a credit card balance doesn’t mean you have to close the account. Instead, you can stop using the card. There's nothing wrong with having an unused credit card stashed away. Just check your credit card statement periodically. That’ll help you keep an eye out for identity theft and unauthorized purchases.
However, if you find you’re tempted to spend money, you may be better off closing it.
Additionally, you can keep the card open, continue to use it and pay the balance in full each month. Lenders want to see a healthy mix of credit on your report. They want to know that you can handle making payments from different sources, like loans, lines of credit and credit cards.
Even if you only put $25 worth of expenses on the card each month, it can help you maintain a low credit utilization rate while demonstrating to lenders that you can manage your money responsibly.
How can I close credit cards?
If you’ve determined that you should close your credit card, here are the steps to take:
Pay off the balance in full. Your lender may not let you close the card without a zero balance.
Redeem your rewards. As mentioned, use your rewards, as you’ll likely lose access to them once the account closes.
Cancel your recurring payments. If you have set up automatic or recurring payments, you'll want to stop these before canceling the card.
Contact your credit card company. You can either call the card company directly or follow online prompts to close your account.
Follow up in writing. After canceling your account, write an email or send a letter to your credit card company to confirm cancellation. Should anything be lost in the shuffle, this can help protect you as it’s further proof of when you requested the cancellation. This letter should include your contact information, account number, reason for closing the account and confirmation that you’d like this request reported to the credit bureaus.
Check your credit reports. It’ll likely take 30 days for the closure to show up on your credit report, but follow up to ensure the account was closed. You can request a free copy of your credit report from Annual Credit Report.
Destroy the card. Once you've verified that the account is closed, destroy the credit card. Use a shredder or scissors to cut it up before throwing it away.
Is closing a credit card right for you?
There are numerous factors that go into determining whether you should close a credit card account. Generally speaking, there’s nothing wrong with keeping an account open, even if you’re not using it. Doing so can lengthen your account history and lower your credit utilization rate.
However, your credit score isn’t the only thing to consider. You may want to think about annual fees and other factors. One such factor is whether you have a zero balance on the account. If you don’t have a zero balance, consider checking out the credit card payoff app from Tally†. Tally helps you efficiently pay down credit card debt and avoid missing payment due dates.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.