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Having a wallet full of plastic can be a big temptation to overspend, which can lead to missed payments and a decreased credit score. If too many credit cards have you busting your budget, this might be a good reason for credit card closure. On the flip side, closing a credit card may hurt your credit score by messing with your credit history and credit utilization rate.

Depending on your situation, there are reasons for credit card closure. Canceling a credit card isn’t a bad idea if you close accounts that cost more to maintain than they’re worth and do it in a way that won’t significantly hurt your score.

Why Would a Credit Card Company Close Your Account?

While you’re considering your reasons for credit card closure, your credit card issuer might be doing the same thing. A credit card company has the right to cancel your card any time, and you may not get any warning it’s been canceled until it’s declined at the register.

A credit card provider will close your account if you quit paying the minimum monthly amount due. Missing one or two payments may only freeze your account until you’re caught back up, but your account will probably be closed after six months of nonpayment. Credit card companies have many other reasons for credit card closure.

Common reasons that may prompt a credit card issuer to cancel your account include:

  • Inactivity with a zero balance for several months
  • A drop in your credit score, especially due to late payments to other companies
  • Eliminating the type of card you have and closing everyone’s accounts
  • Going out of business because they’re no longer profitable

Do Closed Accounts Affect Your Credit Score?

Closing an account can affect your credit score because it can change your credit history and utilization rate, which are two major factors used to calculate your credit score. Your credit history is based on the amount of time all your credit card accounts have been open, so closing an older account can hurt.

Your credit utilization is based on the amount of available credit you’re currently using, so closing an account with a large credit limit and low balance can hurt even more. When deciding whether you should close a credit card account, consider some reasons why credit card closure makes sense.

1. You’re Getting Divorced

If you’re getting separated or divorced from a person who shares a joint account with you, close the account. Otherwise, you remain fully responsible for any bills your soon-to-be-ex might run up on the card. Even if your divorce decree says your former spouse will be responsible for the bill, you’re still on the hook as long as the account remains open. The credit card issuer is only interested in collecting the balance and will look to both accountholders for payment.

2. You Don’t Want to Pay the Fees

If your credit card company is charging an annual fee that you don’t want to pay, ask them to waive it. You can also ask them to waive a late fee if you’re accidentally late and you’re rarely late. If the credit card issuer won’t budge on a hefty annual fee, it could be a good reason for credit card closure and taking your business where there’s no annual fee.

3. The Card No Longer Makes Sense

Maybe you have a card you specifically opened to take advantage of frequent flyer miles because you traveled often for business. If your job no longer requires you to jet around the country or you move somewhere not serviced by the airline associated with this account, the card loses its appeal. Most airline rewards cards carry hefty annual fees after the first year, so it makes sense to close these accounts and switch to a card with a more useful rewards program.

4. The Card Has Been Used Fraudulently

Credit card fraud is the best reason for credit card closure. Typically, the credit card issuer automatically closes your account and issues you a new card when your credit card has been lost or stolen. However, this isn’t always the case when your card is used in other potentially fraudulent ways, such as:

  • You subscribed to a product or service online and, despite your best efforts to cancel the subscription, you keep getting hit with a monthly charge for something you no longer want.
  • You provided your credit card number for the collection of monthly payments on a debt, but the company is taking larger payments than you agreed to make.
  • You let your children use your account once for an emergency, and now, they use it every time another “emergency” occurs.

In these and similar situations, you may want to close your account. Otherwise, you risk having to fight to get future charges reversed.

5. You’re Done with Debt

You may have reached the point where you see no other way to get out of debt than to cancel your credit cards. It’s best for your credit score to keep a credit card or two open and just pay the balance in full each month, but this approach may not work for you. If you know you can’t resist the temptation of whipping out the plastic when you want something you can’t afford, it could be a good reason for credit card closure. However, before you make that decision, ask yourself two questions.

Is It Better to Close Unused Credit Cards?

Sometimes it can be better to close an unused credit card, especially if the card has a hefty annual fee. When you don’t use a credit card enough to outweigh the annual fee and come out ahead on its rewards program, the card is costing you money. It’s probably better to close an account in this situation.

Is It Bad for Credit to Close a Credit Card?

It can be bad for your credit to close a credit card if the card your closing is one of your oldest credit accounts and/or has a high credit limit with a low balance. As previously mentioned, closing older accounts hurts your score by lowering the length of your credit and payment history. Closing an account can also hurt your credit by changing the amount of your revolving credit utilization.

How to Exit Gracefully

If you’ve decided that closing a credit card account is the best course of action, try to minimize the damage to your credit score as much as possible. A credit card in good standing offers a lot of positive credit history that stays on your credit reports longer if you keep it open.

Although closing the account doesn’t make the card automatically disappear from your credit reports, you do lose the benefit of the available credit associated with that account. This changes your balance-to-available-credit ratio or revolving credit utilization.

To understand the credit utilization aspect of your credit reports, get a free credit report card from Credit.com. Calculate your balance-to-available-credit ratio by looking at your available credit compared to how much of this credit you’re using on individual cards and all your credit cards combined. When you’re using a significant portion of your available credit, you lose points when your credit score is calculated. Before closing an account, keep these factors in mind.

1. Keep Your Credit Utilization Ratio Low

An open credit line with a large limit and zero balance helps lower your overall revolving utilization, especially when you’re carrying balances on your other accounts. Keeping utilization at 10% is ideal, but you can still have a good credit score when using up to 25% of your available credit. Before closing an account, calculate how it changes your overall utilization to ensure losing that available credit won’t hurt your score much.

2. Keep Accounts Open

If you have several old accounts, closing one won’t impact your score as much as it would if you only had a couple. Keeping as many of your older accounts open as possible is better for your credit score. If you have only one credit card, it’s seldom a good idea to close your account. About 10% of your credit score is based on the different types of credit you have.

3. Keep Oldest Accounts

Whenever possible, keep your oldest accounts open. Most scoring models consider the age of your accounts, including your oldest and newest accounts, and the average age of all your accounts. A seasoned credit history helps keep your score healthy. A closed account also eventually falls off your credit report, and you lose all the positive history associated with the account.

After weighing the pros and cons, sometimes it just doesn’t make sense to keep hanging onto a credit card. Before you close that account, make sure your credit score won’t suffer too badly. Sign up for Credit.com’s Credit Report Card and receive the latest tips and advice from a team of credit and money experts. You also benefit from a free credit score and action plan that helps you determine whether closing a credit card account is right for your situation.

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