The Points Mom

How Does Canceling A Card Affect Your Credit Score?

 

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Your FICO credit score is basically determined by how you rate in 5 FICO categories.  The first 2 categories, payment history and outstanding debt, account for almost 2/3 of your credit score.  15% of your credit score is based on the length of your credit history.

You will rate high in this 15% category if once you have a credit card, you maintain that account for a long period of time.  However, this point is contrary to some of the tips that I give as to how to play the credit card points and miles game.  Specifically, I suggest that you sign up for cards to get lucrative point and mile bonus offers.  When you get the bill a year later for the annual fee, I may have you try to downgrade the card to a no-fee version. If that option is not available, I may suggest that you cancel the card IF you don’t use the card and don’t want to pay an annual fee.  If you do this, you will likely keep these accounts open for only about a year before you cancel them.  So we need to ask how does canceling a card affect your credit score?

It may affect it, but only a little.

First, the length of you credit history is only 15% of your total credit score

Like I said above, payment history and outstanding debt make up 65% of your score.  If you make your payments on time and keep your debt at around 30% of your available credit (a 30% utilization rate), canceling a card or 2 each year should have a minimal impact on your score.  I cancel cards all the time.  Over the last few years, to avoid annual fees, I have canceled a bunch of cards.  You can read all about my card history here.

Second, there will be cards that you have had for a long period of time that will help your credit score (or at least there should be)

You should have some staple cards that you use for your purchases when you are not trying to meet a spend requirement or trying to accumulate specific loyalty points.  For me these cards are (right now-it changes) my American Express Gold card for restaurants and groceries, my Chase Freedom card for gas, my Chase Sapphire Reserve for local travel, my American Express Platinum for airfare, my Citi ThankYou Premier for entertainment and either my American Express Blue Business card or my Chase Freedom Unlimited for everything else.  Do you want to talk about a long term credit history?  I have been an American Express card member since 1988.  How is that for history?!?!?!

Third, even if your available credit goes down because you canceled a card, as long as you have other cards, a strong utilization ratio will keep your score high

Don’t forget, your utilization ratio is a ratio which compares the amount of credit being used to the amount of total credit you have available.  You should try to keep this ratio at about 20%-30% or less.

One trick to try after you cancel a card is to try request a credit limit boost on another card in order to maintain the ratio.  (I have never done this but will actually try to do so in the future.)

Another thing here that may work in your favor is that the card you are canceling, may have had a low credit limit anyway.  Remember, as you apply for a greater number of cards, you may need to push some of  your credit applications along.  One way to do this is to request a small credit limit.  Another way to do this is to transfer some of your existing credit to the new card.  In both cases, it is likely that your credit limit on this new account will be low.  Canceling a card with a low credit limit will not have such a big impact on your credit score because the credit limit portion of your utilization ratio will only be slightly reduced when you cancel the card.

Lastly, the cards that you are canceling, you have likely not held for very long anyway

You may only be applying for a card to get the bonus and will cancel when the annual fee becomes due.  We know that a longer credit history provides more information and offers a better indicator of your behavior.  So canceling these short-term accounts has less of a negative impact on your score then if you were to close an older account.