Does Canceling a Credit Card Hurt or Help My Score?

Introduction: Canceling a credit card can be a liberating experience, especially when you pay off the outstanding balance. It's like wiping the slate clean with your debt. But it can also affect your credit score. How it affects your score will depend on several factors. In some cases, canceling a credit card can hurt your credit. In other cases, it can actually help. It depends on several factors, all of which are explained below.

Reader Question: "I recently paid off a couple of credit cards and I plan to close two of them. But I'm worried about how this might affect my FICO score. I've read that it can help or hurt my overall credit profile, which leaves me totally confused. Will closing a credit card account lower my score? I don't mind leaving the accounts open, if that's what it takes to keep my score up."

In Some Scenarios, Canceling a Card Can Hurt Your Credit Score

Yes, there's a chance that canceling a credit card can hurt your FICO credit score. But there are also scenarios where it has very little negative effect, or even a positive effect. It largely depends on the balance of the card(s) in question, in relation to the available limit.

Before we go any further, let's talk about the five factors that influence your score the most. Here's a chart that shows all five of them:

FICO scoring chart

You can see that the "amounts owed" accounts for 30% of your overall credit score -- with the FICO scoring model, at least. This refers to the amount you owe on your various credit accounts, including your cards.

Having an outstanding balance on your credit cards does not necessarily hurt your score. In fact, it can actually help. According to the MyFICO website:

In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all. Having a low credit utilization ratio can be better than having a high one, or none at all.

Problems can occur, however, when you have a very high balance in relation to your available credit limit. If you are using a higher percentage of your available limits (i.e., you have nearly "maxed out" your cards), it raises a red flag in the scoring models. It suggests that you are over-relying on credit and, as a result, are statistically more likely to miss payments in the future. This could lower your score.

Remember, your credit score is designed to show lenders and creditors how likely you are to miss payments in the future, based on how you have managed credit in the past.

Now we're getting back to the question at hand: Does canceling a credit card hurt or help you overall credit score? It largely depends on how your credit profile shifts as a result of the account cancellation, and what happens to your "utilization ratio."

Understanding the Utilization Ratio

There's an important concept at the heart of all this, and that's your credit utilization ratio. In the chart above, this is referred to as the "amounts owed" and is shown in red. This factor compares your balance to your available credit limit.

If you are using a high percentage of your available limit (i.e., you are nearly maxed out on your credit cards), then you could be suppressing or harming your credit score. On the contrary, if you reduce the balance so that you're only using a small percentage of your available limit, your score could actually rise over time.

So what does this have to do with canceling credit cards? Good question. Your utilization ratio is actually measured across all of your credit cards. That's why it is so hard to give a definitive "yes" or "no" answer to this question. This will all make more sense with an example...

An Example Scenario With Multiple Cards

Let's assume that I have three different cards. One of them has a pretty high balance, relative to the available limit. In other words, it has a high utilization ratio. The other two cards have much lower balances, relative to their credit limits. It breaks down like this:

Card #1
Limit: $2,000
Balance: $1,800

Card #2
Limit: $2,000
Balance: $100

Card #3
Limit: $2,000
Balance: $300

In this scenario, my total credit limit across all of the open accounts would be $6,000 (2,000 x 3). My combined balance across all cards is $2,200. So I'm only using 36% of my combined limit. Yes, I have one card that's nearly maxed out, but I also have two others with very low balances.

Now let's assume that I pay off cards #2 and #3 and cancel the accounts entirely:

After canceling #2 and #3, my utilization ratio has changed dramatically. Now I only have a single card left open (#1), and it has a big balance on it. Guess what happens to my overall credit utilization ratio? It shoots up to 90%. This is a scenario where canceling credit cards could potentially lower my score, by increasing my utilization ratio.

Recap: Things to Consider Before Canceling Credit Accounts

We've talked about a lot of different things here, so let's recap some of the key points.

  • Canceling cards may increase or decrease your credit score, depending on which ones you cancel.
  • The most important thing is your credit utilization ratio, and you can improve this factor just by paying your balances down (and keeping the accounts open).
  • If you need to close those accounts for some valid reason, then go ahead and do it. If you need your score to stay where it is now (as much as possible, anyway), then you might want to hold off on closing those accounts for the time being.
  • You also need to understand the "utilization ratio," which is a comparison between you available credit limits and the amount you are currently using.

In the end, this is a decision that only you can make for yourself. All I can do is explain how closing an account might affect your credit score in the long run. It could certainly have an effect, but it's only one of several factors that go into the scoring models.

Disclaimer: This article has been provided for educational purposes and includes generic scenarios and information that might not apply to your situation. This article should not be viewed as financial advice. We make no claims, guarantees or assertions regarding what might happen when you cancel a credit card account. Do not make any financial decisions based on the information presented above. Every credit scenario is different, because there are many variables involved. We encourage you to continue your research beyond this website.