Does Canceling Credit Cards Hurt Your Credit?

Woman on the telephone holding a credit card.
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Canceling a credit card may seem like the right thing to do when you get a new one or don't want to use it anymore. However, closing a card can actually have several negative effects on your credit score. In some cases, a provider takes the decision out of your hands by closing an inactive card. The implications are the same.

Increased Utilization Rate

When you cancel a credit card, your utilization ratio goes up. This ratio is the amount of balances you have as a percentage of the credit available to you on credit accounts. A relatively low utilization rate is a sign to lenders that you aren't desperate when you apply for a loan. When you cancel a card, you don't have that card's limit available anymore, which means your utilization ratio goes up. "Amounts owed" accounts for 30 percent of your FICO score and utilization is a key factor.

Shorter Length of Credit

Another thing credit scoring models and lenders consider is the average length of your credit history. Length of credit affects 15 percent of your FICO score. When you cancel an older card, your length of credit goes down. The impact is negative on your score. Cancelling a newer card doesn't affect your length of credit much, but there isn't much point in applying and getting a new card just to cancel it right away.

Payment History Remains

Payment history, which accounts for 35 percent of your FICO score, doesn't disappear when you cancel a card, according to Bankrate. This factor benefits you if you have a strong history of on-time payments with the card you cancel. On the flip side, you can't make a history of a lot of late or missed payments vanish from your score by canceling the card. Therefore, the payment history implications shouldn't carry a lot of weight in your decision to cancel a card.

Other Factors

The mix of credit accounts you have is a minor factor to consider when canceling a card. Account types affect 10 percent of your FICO score. If you cancel your only credit card, you limit the diversity of accounts, which is negative. However, the impact is mitigated by the fact that the card history remains for up to 10 years after you close it, according to Bankrate. A more practical consideration is whether you can use the card with discipline. Some people close accounts to avoid the temptation of using them. An alternative, to preserve your positive credit factors, is to cut up the card.