What Happens to Your Credit Score if You Close a Credit Card?

Closing a credit card can sometimes make sense, but it could also impact your credit score.

Some people use the same credit cards for years before deciding to upgrade to cards with better terms and offers. If you have credit cards in your collection that you hardly ever swipe, you may be thinking of closing those accounts. After all, the fewer cards you have, the less there is for a criminal to get a hold of one of your account numbers and rack up charges in your name. Plus, if you're paying an annual fee for a credit card that gets no use, you're effectively throwing your money away.

In some cases, closing an old credit card is a smart move -- such as if you're paying an annual fee but getting nothing in return. But before you close a credit card with no fee, you may want to consider the potential damage it could cause to your credit score.

Don't compromise your credit score

Whether closing a credit card hurts your credit score will hinge on a few different factors:

• How long you've had that account open
• Your spending limit on that account
• Your current balance across all of your credit cards

There are different factors that go into calculating your credit score, and one is the length of your credit history. If you keep the same credit card open for many years, that will help your score, whereas if all of your credit card accounts are newer, your score might suffer. If you close a credit card you've had for 10 years and your remaining cards are only two years old, you can expect your score to go down.

Another thing that goes into determining your credit score is your credit utilization ratio. That ratio measures how much of your credit limit across all of your cards you're using at once. A credit utilization ratio of 30% or less will generally help your score, while a higher ratio will usually hurt it.

Now, say you have a total credit limit of $10,000 across your various cards, and your current balance is $3,000. That puts you at 30% utilization, which is still in favorable territory. If you close a credit card with a $4,000 spending limit, suddenly, your total limit drops to $6,000. If you owe $3,000, you're looking at a utilization ratio of 50%, which isn't so good for credit score purposes.

That said, if you're carrying a small credit card balance, you may be able to close a card without a hit to your credit score, even if closing that account lowers your total credit limit substantially. Imagine that instead of a $3,000 credit card balance, you only owe $500 across all of your cards. If your total spending limit drops from $10,000 to $6,000, you'll still be in favorable territory from a utilization standpoint, and so your score shouldn't be negatively affected.

Should you close an old credit card?

If you're not paying an annual fee for a credit card you don't use and that account has been open a long time, you're probably better off keeping it open. But if you're looking to close a newer card with a small spending limit, then you might easily get away with canceling that account and seeing little to no credit score impact.

Remember, too, that if your credit limit shrinks as a result of you closing a credit card, you can always ask your remaining card issuers to raise your credit limit. Or, you can apply for a new credit card that will bring your total spending limit back up. The key, either way, is to understand the impact that closing a credit card might have and take steps to avoid credit score damage in the process.