A Guide to Closing Credit Card Accounts

Credit card debt has been in the news more than usual since the total amount owed by U.S. adults squealed past the one trillion dollar mark.

Along with that massive debt often comes sky-high fees and soaring interest rates—not to mention the lingering stress and anxiety such bills can cause for millions of Americans. Research found that nearly three-quarters of those surveyed (73%) said owning credit cards made managing their money more challenging. This may be why some people have the urge to churn and burn the little pieces of plastic when a big debt is finally knocked out.

But before you reach for your sharpest scissors or call your credit card issuer, there are some factors to consider on how closing a credit card account could impact your financial life and your credit score.

What Happens When You Close a Credit Card Account

In the simplest terms, when you close an account, you lose that line of credit. That tends to automatically increase your credit utilization ratio which can ding your credit score. Remember, your credit utilization ratio compares the amount of credit being used on all of your credit cards to the amount of total credit available to you. (It also looks at how much of your credit you’re using on each card.) The higher the utilization rate, the worse it is for your credit score. Ideally, you need to keep your balances at 30% or less of your total available credit.

Consider Your History. If the card you want to drop is the oldest in your wallet you may want to reconsider ditching it. Closing your oldest account will also drag down your credit score. Why? Because credit history counts for 21% of a VantageScore* credit score and 15% of a FICO score.

Know Your Options. Instead of canceling your oldest card, or any card, evaluate the alternatives. You can keep an account active by using it to only pay a specific bill every month. The same goes for credit lines that a card issuer warns may be closed because of inactivity. When that happens, start making one or two small purchases a month then pay off the amount immediately.

Beware of High Fees. While cards with higher annual fees often come with better perks, they can be budget busters if you aren’t careful. So if you are looking to switch cards to avoid paying an annual fee, you can try and replace the line of credit with another card that doesn’t charge fees. How? Ask your credit card issuer if you can swap to another card (within the same family of cards) with no fee.

If your card issuer won’t do that, consider transferring the balance to a card with a lower (or no) interest introductory offer. Then, set up an automatic monthly transfer from your checking account to make sure you aren’t late with a payment.

To Cancel or Not to Cancel?

Ultimately, whether or not you should cancel a card is a personal decision. You have to know yourself and your level of willpower when it comes to spending. It can be extremely difficult to keep yourself from charging up a storm once you paid off a mountain of debt. So if you absolutely cannot withstand the temptation to tap or swipe your way into more high-interest debt, you may be better served by closing some accounts.