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Does Cancelling a Credit Card Hurt Your Credit?

If your wallet is feeling overcrowded and you have a credit card you barely use, you might be considering cancelling it. But after asking around about how to cancel a credit card, you might have heard that cancelling a credit card can hurt your credit score.

Well, the hard truth is, they're right. Cancelling a credit card will very likely cause your credit score to decline. Understanding how credit bureaus calculate your credit score (at least to a basic degree) can help you determine how cancelling a credit card might hurt your credit score, and what you can do to mitigate the impact.

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Read this first

If you're unable to control your spending with a credit card and need to remove the temptation, you shouldn't be worried about your credit score. If it makes you feel more in control of your financial situation, go ahead and cancel that credit card right away.

That said, there are other options that might help. Make the credit card unusable. Shred the card, and don't bother activating any replacement cards credit card companies might send you. Delete the card from your online shopping accounts. These steps will make the card practically unusable unless you've memorized the account number, expiration date, and security code.

The only way to be sure you can't use the card again, though, is to cancel it.

Now that that's out of the way, let's move on to see why cancelling a credit card can hurt your credit score.

How credit bureaus calculate your credit score

Credit bureaus use five main factors to determine your credit score, and they are all weighted differently.

Payment History

35%

Credit Utilization

30%

Length of Credit History

15%

Credit Mix

10%

New Credit

10%

Data source: MyFICO.

The good news is, cancelling a credit card doesn't remove the account from your credit report. It'll stick around for another 10 years. As a result, your payment history and credit history length remain intact for the next decade.

But cancelling a credit card does remove the line of credit attached to the account, which could negatively impact your credit utilization -- the percentage of your available credit used at any point in time. Lowering my credit utilization increased my credit score nearly 50 points.

Don't cancel unless you have to

Since credit utilization is such a big factor in how the credit bureaus calculate credit scores, it's to your benefit to do what you can not to cancel your credit card.

If you just don't use the card anymore, consider simply leaving it out of your wallet and storing it somewhere safe. Some people recommend putting a recurring charge like a subscription on the card to keep it active and prevent the credit card companies from cancelling cards automatically. That's not really necessary, in my experience, but it doesn't hurt. Just make sure you pay the bill on time. (Use autopay.)

If you can't justify paying the annual fee for a credit card, you still have options. Credit card companies often offer retention bonuses to customers that call in looking to cancel. They might waive the annual fee or offer bonus points just for asking. If you've been a good customer for a long time, it's more likely you'll get offered some incentive to keep the card.

Another option is to ask to change to a no-annual-fee credit card. This process keeps the account exactly the same -- same account number, same credit limit, same account age -- it just changes the product used to access the line of credit. You'll also avoid a hard pull on your credit account, and you might be able to switch to a no-annual-fee credit card if it's from the same company as your current card. This process also has the advantage of potentially holding onto any rewards points you've accrued, but haven't yet spent. Unfortunately, this option isn't available for every credit card.

Even if you're not going to use the credit card, it never hurts to have an extra line of credit at your disposal if you ever need it.

Mitigating the impact of cancelling a credit card

As mentioned, the biggest negative impact of cancelling a credit card is the impact on your credit utilization ratio. If you continue to spend the same amount on your credit cards, but you have less available credit to spend, your credit utilization is going to go up.

There are a few strategies to manage your credit utilization if you need to increase your credit score fast. In order of my own preference:

  • Call up your credit card companies to find when they report your credit card balance to the credit bureaus, and pay off most of your balance before that date.
  • If your credit utilization ever climbs above your desired ratio, pay off some of your balance to lower it back down.
  • Just use cash instead of credit cards for most purchases. (You'll miss out on rewards with this strategy, but the payoff could still be worth it.)

Using these strategies can help offset the negative impact of cancelling a credit card. So, if you feel you absolutely must cancel a credit card, you can take the extra steps to ease the hurt on your credit score.

While cancelling a credit card will hurt your credit score, you should now be armed with the knowledge to understand how badly your score will get hurt and what you can do about it. Review your options and make the best decision for you.

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