Cancelling a credit card should not affect your credit score! I say “should not” (with a heavy emphasis on should) because there are some things that you need to do in order to ensure that cancelling your credit card does not negatively impact your overall credit.
There are a variety of reasons that you may want to cancel a credit card, from avoiding the annual fee, to simplicity and consolidation of your credit. Whatever your motivation to cancel a card, keep in mind that there is no such thing as “too much credit” and that your credit score is NOT affected by credit cards that you have open but never use!
Remember, your credit score is important, not only to your ability to apply and get approved for credit cards that can help you travel the world, but also for favorable interest rates on mortgages, car loans, etc. Before getting into the specifics, remember the factors that contribute to your overall credit score (which I detailed further in a previous post):
When you cancel a credit card, there are a couple of factors that could be impacted, most importantly, your credit card utilization ratio.
Credit Card Utilization – the ratio of credit used/credit available (i.e. $1,000 credit card bill/$10,000 credit limit on the card = 10% Credit Card Utilization – the lower the % the better!).
Let’s take a look at Credit Card Utilization Ratio and how it is affected by cancelling a credit card. In this scenario, imagine that you have two credit cards and are considering cancelling one.
Note that in your current state you have a credit card utilization ratio of 5%.
Option 1: Cancelling a Credit Card Outright –
As you can see, by utilizing this option you are reducing your total available credit and thereby increasing your overall credit utilization ratio. This increase in credit utilization ratio may result in a decrease to your credit score.
In addition to cancelling the card outright, you have 2 additional options that will not affect your utilization ratio!
Option 2: Moving a Credit Line from Card 2 to Card 1, THEN Cancelling Card 2 –
With this option you move the credit line from one card to another and do not experience any decrease to credit line or increase to utilization ratio. Keep in mind that it is only possible to use this option if you have multiple credit cards with the same bank. For example, if both credit card 1 and credit card 2 are issued by Chase Bank, then Chase will allow the credit move, considering your overall credit granted by Chase remains the same.
Option 3: Downgrade the Card to a “No Fee” Version –
If a steep annual fee is your reason for cancelling a credit card, then know that downgrading the card to a “no fee” card may be an option. Many cards that charge annual fees have a similar “no frills” version of the card that charges no annual fee. The benefits of the card will not be at the same level of the fee version, but you will save yourself that annual fee payment! I have utilized this technique numerous times in the past and it has allowed me to avoid annual fees while keeping my line of credit high and credit card utilization rate low.
There are other factors to consider when determining how cancelling a credit card may affect your credit (such as age of credit, and total accounts), but your credit card utilization is probably the most important to consider.
If you have any questions or comments on downgrading or cancelling credit cards then feel free to email me at email@example.com.