This story is part of CNBC Make It's One-Minute Money Hacks series, which provides easy, straightforward tips and tricks to help you understand your finances and take control of your money.
If your credit card annual fee is starting to feel like it's not worth your while, don't close the card: consider downgrading it instead.
Downgrading a credit card means switching to another card from your same issuer that has a lower fee, or none at all, usually in exchange for fewer points and rewards.
Closing a card can hurt your credit score because it lowers your credit limit, which in turn increases your credit utilization rate. Your utilization rate is one of the main factors used to determine your credit score: It shows what percentage of your credit limit you use and is used by lenders to measure your risk.
If you have $5,000 in available credit and you normally spend $1,000 on your card each month, that represents a credit utilization rate of 20%. Closing one of your cards and lowering that available credit to $3,000 would increase your utilization rate to 33% without changing your spending.
By downgrading a card instead of closing it, you can keep your overall line of credit intact while also avoiding the annual fee.
Downgrading is also preferable to closing a card because it means your account is still active. You can continue to grow your credit history, which can also help you increase your credit score.
Downgrading a card is typically an easy process. Simply call your card issuer's customer service department before your card's annual fee renews and tell the representative that you'd like to downgrade. They may try to offer you a points bonus to keep your existing card, but will downgrade if you ask.
Once your card is downgraded, check with your issuer to see if the card will be closed if you stop using it for an extended period of inactivity. If so, consider putting a small recurring expense on it — like a Netflix subscription — to keep the line of credit open.
Sign up now: Get smarter about your money and career with our weekly newsletter
Don't miss: Don't wait any longer to book your summer travel, says Scott's Cheap Flights founder
Does Closing a Credit Card Hurt Your Credit?
Does canceling a credit card hurt your credit? You’ve likely heard that closing a credit card account may damage your credit score. And while it is generally true that cancelling a credit card can impact your score, that isn’t always the case. If you pay off all your credit card accounts (not just the one you’re canceling) to $0 before canceling your card, you can avoid a decrease in your credit score.
Typically, leaving your credit card accounts open is the best option, even if you’re not using them. However, there are a few valid reasons for deciding to close an account. It’s best to close joint credit card accounts during a separation or divorce, for instance, or if your credit card company chares high annual fees.
Read on to learn what they are—and to get details on how to cancel a card the right way.
Key Takeaways
- Closing a credit card account is sometimes necessary, despite advice against doing so.
- A credit card can be canceled without harming your credit score.
- To avoid damage to your credit score, paying down credit card balances first (not just the one you’re canceling) is key.
- Closing a charge card won’t affect your credit history (history is a factor in your overall credit score).
Understanding the Impact of Credit Utilization Ratio
Credit experts advise against closing credit cards, even when you’re not using them, for good reason. “Canceling a credit card has the potential to reduce your score, not increase it,” says Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report.
Closing a credit card can impact your credit utilization ratio, potentially dinging your credit score. Credit utilization measures how much of your total available credit is being used, based on your credit reports. The more available credit you use (per your reports), the worse the impact will be on your score.
Here’s a simple example of how closing a $0 balance credit card backfires:
- Credit card number one has a $1,000 limit and a $1,000 balance.
- Credit card number two has a $1,000 limit and a $0 balance.
- Your credit utilization on both cards combined is 50% ($1,000 total balances ÷ $2,000 in total limits = 50% utilization).
- Close credit card number two, and your credit utilization jumps to 100% ($1,000 total balances ÷ $1,000 total limits = 100% utilization).
You should aim to pay your credit card balances in full every month. Doing so not only protects your credit scores but also can save you a lot of money in interest.
Paying your balance in full is especially important before closing a credit card account. Provided all of your credit cards show $0 balances on your credit reports, you can close a card without hurting your credit score.
The higher the credit utilization ratio, the more it can negatively impact your credit score. That’s why it is commonly recommended to keep the ratio below 30%.
Good Reasons to Cancel a Credit Card
Canceling a credit card is usually a bad idea. Nevertheless, there are some circumstances in which a card cancellation could be in your best interest. Here are three.
Separation or divorce
It’s best to close joint credit card accounts during a separation or divorce. As a joint card holder, you’ll be liable for any past or future charges made on the account. It’s not uncommon for an angry ex to run up excessive charges on a joint card out of spite.
If that happens—or even if routine spending occurs on a joint account after separation—the charges will be your responsibility as well. Your divorce decree might state that your former spouse is responsible for the debt, but that won’t release you from your obligation in your lender’s eyes.
High annual fees
If your card issuer charges you a high annual fee for an account that you don’t use, cancellation might be warranted. However, if you receive benefits from the account that outweigh the annual fee, such as travel credits and perks, it might be worth the cost.
An annual fee on a credit card that you don’t use or benefit from is another story.
Before you cancel the account, call your card issuer to ask for the annual fee to be waived. Be sure to mention that you’re considering closing your account. It doesn’t hurt to ask, and you might be pleasantly surprised.
Too much temptation
Some people find the temptation to use credit cards too much to resist. And while this might be a valid reason to close a card for some, you can try other ways to curb overspending without sacrificing your credit score.
You could remove your credit cards from your wallet, for example, and store them in a safe place. By not having your cards readily available, you may find the temptation easier to resist.
Once a credit card is canceled, you won’t be able to reopen the account.
How to Cancel a Credit Card: 6 Steps
Let’s say you do decide that closing the account is the best move. Here are six simple tips to help you navigate the process:
- Redeem unused rewards on your account before you call to cancel.
- Ideally, pay off all your credit card accounts (not just the one you’re canceling) to $0 before canceling any card. At the very least, minimize your balances as much as possible.
- Call your credit card issuer to cancel and confirm that your balance on the account is $0.
- Mail a certified letter to your card issuer to cancel the account. In this letter, request that written confirmation of your $0 balance and closed account status be mailed to you.
- Check your three credit reports 30 to 45 days after cancellation to make sure that the account reports that it was closed by the cardholder and that your balance is $0.
- Dispute any incorrect information on your reports with the three credit bureaus.
Closing a Credit Card Won’t Impact Your Credit History
You may have heard that closing a credit card causes you to “lose credit” for the age of the account. That is mostly a myth.
Credit expert John Ulzheimer, formerly of FICO and Equifax, confirms that closing a credit card will not immediately remove it from your credit reports. “As long as the credit card remains on your report, you will still get the value of the age of the account in both the FICO and VantageScore branding credit scoring models. The only way to lose the value of the age of the card is if it’s removed from your reports,” Ulzheimer says.
A closed account will remain on your reports for up to seven years (if negative) or around 10 years (if positive). As long as the account is on your reports, it will be factored into the average age of your credit.
15%
The percent that FICO uses to factor in credit history as part of your overall credit score. Payment history and amounts owed, which have the largest impact out of five categories, account for 35% and 30%, respectively.
How does closing a credit card affect your credit score?
Your credit score might be hurt if closing the card changes your credit utilization ratio. Credit utilization measures how much of your total available credit is being used, based on your credit reports. The more available credit you use, the worse the impact will be on your score. Aim for a ratio of around 30%.
How do you keep your utilization rate low?
Don’t keep a large balance, and do this by paying it off every month (this will also save you from paying interest). Provided all of your credit cards show $0 balances on your credit reports, you can close a card without hurting your credit score.
Will closing a card damage my credit history?
Not really. A closed account will remain on your reports for up to seven years (if negative) or around 10 years (if positive). As long as the account is on your reports, it will be factored into the average age of your credit.
The Bottom Line
Don’t close a credit card account without a good reason. Having a lot of credit cards won’t necessarily hurt your credit score significantly if you handle them responsibly. However, if you need to cancel a card, do your best to reduce all your credit card balances first (preferably to $0), so you can either minimize or totally avoid any credit score damage.