What Happens When You Cancel a Credit Card?

There may come a point when you decide that it's time to cancel a credit card account of yours. Maybe you hardly use it, or you're tired of paying an annual fee for a card you're not getting much benefit from.

Canceling a credit card could have different consequences. So it's important to know what to expect. 

You'll lose your rewards points

One benefit of using credit cards is getting rewarded for your purchases, whether via points you redeem for gift cards or cash back. When you cancel a credit card, you may have to forfeit any rewards you've earned but haven't redeemed. So you may want to first cash out your rewards and then cancel.

Your credit score could take a hit

Canceling a credit card could impact your credit score in a couple of ways. First, one factor that goes into calculating your score is the length of your credit history, which comprises 15% of your score. 

If you cancel a credit card account you've only had open for a short period of time, it may not have such an impact on your score. But if you cancel a credit card you've had open for a decade or longer, your credit score might drop, because canceling that card might eventually shorten the average length of your open accounts.

Another factor that goes into calculating your credit score is your credit utilization ratio, or the amount of revolving credit you're using at once. Once that ratio starts to exceed 30%, it can damage your score. If you cancel a credit card, you'll lower your total spending limit. So the spending you do on your various credit cards will take up a larger percentage of your total available credit and could cause an unfavorable credit utilization ratio.

You should also know that your credit utilization ratio comprises 30% of your total credit score, which means it carries double the weight of the length of your credit history. So before you cancel a credit card, you may want to see if you can get your spending limit raised on another one to keep your utilization in stable territory. Often, a credit card issuer will agree to raise your spending limit if your account is in good standing, has been open a while, and your income has gone up since you first applied for your account. 

Know what you're getting into

There's little sense in paying an annual fee for a credit card you don't use or need. But before you cancel a credit card that doesn't have an annual fee, think about whether it pays to keep the account open and just make the occasional purchase on it. Doing so could help your credit score stay in good shape. And that could result in a lot of savings the next time you go to apply for a loan.

Plus, while you should aim to have cash in a savings account and not just fall back on your credit cards for emergency expenses, sometimes, the latter becomes necessary. So the higher your total spending limit, the more options you have in that type of scenario.