Is closing a credit card bad for your credit score?

There are some great reasons to close a credit card, like if you’re paying more in annual fees than you are reaping back in rewards, or worse: aided by plastic, your spending is starting to get out of hand.

But before you grab the scissors and cut up your card, you might want to slow down and think again. Closing a credit card is not always as simple as it sounds. In some cases, it can even hurt your credit score.  

Here is what to consider before you cancel a card, what it could mean for your credit score, and how to close a credit card safely.

When does it make sense to cancel your credit card?

There are times when cancelling a credit card is smart and practical. For example:

• The annual fee is not worth it anymore: Many cards charge yearly fees. If you are no longer using the card enough to justify the cost, cancelling might save you money.
• You have too many cards to manage: If juggling multiple cards stresses you out, paring down your wallet can make day-to-day money management easier.
• The card no longer meets your needs: Maybe you found a card with a lower interest rate or better rewards. Or maybe your spending habits have changed. If another card works better for your lifestyle, you may want to close the old one.
• The card creates temptation to overspend: If a certain card tends to push you into impulse purchases, putting it away for good might protect your budget.

When does it not make sense to cancel your credit card?

Sometimes, keeping a card open is the better option. Here’s when you should consider keeping that card in your wallet.

• It is your oldest credit card: The age of your accounts affects your credit score. Older cards help build a long, healthy credit history. Closing your oldest card removes that benefit.
• You have upcoming applications for loans or credit: If you plan to apply for a mortgage, car loan, or new credit card soon, it is wise to avoid major changes to your credit mix. Closing a card before applying may cause a temporary drop in your score.
• You have unused rewards or points: Once the card is closed, those rewards may disappear for good. You will want to use or transfer them first.

Related: Which credit card program in Canada is the best for you?

Is cancelling your credit card bad for your credit score?

It depends on your situation, but cancelling a card can affect your credit score in two main ways.

It can change your credit utilization ratio.

Your credit utilization ratio looks at how much of your available credit you are using. If you close a card, your overall limit goes down. This can make your utilization rate jump, even if your spending stays the same. A higher utilization rate can lower your credit score.

For example, if you have three cards with a combined limit of $10,000 and usually carry a balance of $3,000 across all three cards, your utilization is 33%. If you cancel one card and your total limit drops to $6,000, that same $3,000 balance becomes a utilization rate of 50%. A jump like this can pull down your score.

Learn more: How to calculate your credit utilization ratio

It can affect your credit history.

The longer you have had a card, the more it helps show lenders that you are stable and reliable when using credit. Closing it does not erase your credit history, but it may reduce the average age of your accounts over time.

Other considerations to make before cancelling your credit card

Before you make the call:

• Check for remaining balances. Even if your last statement shows zero, there may be residual interest or fees. Call your credit card issuer to confirm the balance is truly paid in full.
• Redeem rewards and cash back. Some programs only pay out rewards once a year, while others let you redeem at any time. Travel points may or may not be transferable. Make sure you understand your options, and don’t leave money on the table.
• Re-evaluate the card’s insurance or perks. Some credit cards offer travel insurance, rental car insurance, extended warranty protection, roadside assistance, or purchase coverage. Those benefits disappear once the card is closed.
• Think about your credit mix. Having different types of credit, such as a loan and a credit card, can help your score. Make sure cancelling will not leave you with too few active accounts.

How to close your credit card safely

If you decide cancelling your credit card is the right move, follow these steps:

1. Pay off the full balance and confirm with your lender that nothing remains owing.
2. Redeem or transfer your rewards so you do not lose them.
3. Call your credit card provider to request the cancellation. Ask for written confirmation.
4. Take notes with the date, time and name of the representative you spoke with.
5. Check your credit report a month or two later to make sure the account shows as closed.

Closing a credit card can be a healthy financial choice when done thoughtfully. Before getting out the kitchen shears, take the time to review your needs and follow the proper steps to make a clean cut.