Will closing my credit card affect my credit score?

Maybe you're thinking of closing a credit card account to avoid the annual fee, or maybe your credit card doesn't have rewards that suit your lifestyle. Before you close a credit card account, learn why canceling a credit card can hurt your credit score.

How closing a credit card can affect your credit score

There are two main ways closing a card can affect your credit score. One involves your credit usage rate and the other involves the age of your credit.

Lower total credit available

For starters, your credit score is based on how much of your available credit you're actually using. This is called your credit utilization ratio. For a given level of spending, lowering your total credit available gives you a higher utilization ratio.

For example, if the available credit for all your cards combined is $10,000 and you have a total of $2,000 in charges, your utilization ratio is 20 percent (2,000/10,000=.20). If the card you cancel has a credit limit of $3,000, your total credit available goes down to $7,000. With the same $2,000 in spending, your utilization ratio is now 29 percent. A higher ratio may hurt your credit score. The best scores usually have a ratio between .01-.10, meaning you're using 10 percent or less of your available credit. Good scores usually fall at or below 30 percent. Anything above this might damage your score.

The average age of your accounts will decrease

The longer you've had credit, the better it is for your credit score. Your score is based on the average age of all your accounts, so closing the one that's been open the longest could lower your score the most. Closing a new account will have less of an impact. To keep your credit score in good standing, it's important to remember to stick with a low balance that can easily be paid off before your due date.

When does canceling my credit card make sense?

In some cases, it might make sense to close a credit card account. Sometimes, it can save you money — like in the case of annual fee cards — or actually help your credit indirectly, by encouraging you to spend less.

The card has a high annual fee

If your card has an expensive annual fee and you don't use the rewards, it may be worth closing the card. Before you do, remember that you may lose the rewards you currently are eligible for. As an alternative, find out if the card issuer can transfer your account to a different card that doesn't carry a fee. This lets you keep the account open while avoiding the annual fee.

You struggle with overspending

If you have a tendency to max out your credit cards, closing an account will encourage you to spend less. However, if you shift your spending to another account, you won't save money on that spend and you could still lower your score from closing the other account.

Your card has a high interest rate

If your card has a high interest rate, it makes sense to avoid carrying a balance on the card. You don't need to close the card to avoid interest if you make sure to pay off the balance every month or simply don't use the card.

Make sure you only charge items you can pay off in full to avoid interest and keep the account open. You'll need to use the card occasionally to avoid having it closed by the card issuer, but it only takes a small charge every once in a while to avoid closure.

You want to upgrade to a rewards card

If you're planning to close an account because you want to upgrade to a different card, ask the issuer to transfer your account to the new card instead. Balance transfers don't usually incur direct changes to your credit score, but opening a new card may. This could be an increase or decrease in score depending on the circumstance and other factors in your credit history.

Why should I keep my credit card account open?

Of course, in many cases, it makes sense to keep credit cards open.

It's the oldest account on your credit report

The length of time you've had credit is a factor in your credit score, so it's a good idea to keep older accounts open. A high average age for your accounts can improve your score, so keeping your oldest account open has a positive effect on your score.

For example, if you have four cards that have been open ten years, five years, four years, and one year, the average age is five years (20/4). If you close the account that's been open 10 years, the average age drops to 2.5 years (10/4).

You should try to keep your oldest account open unless you have a compelling reason to close it.

You only want to close your card because you don't use it often

There's typically no penalty for rarely using a card. Although the card issuer might cancel it if you never use it. Using it once in a while could deter this from happening. You don't have to keep the card in your wallet, but you should leave the account open to help maintain your credit score.

You don't have many other accounts open

It's important to note that your credit score may be higher depending on your total available credit. If you have few accounts, closing one could have an impact on your total credit available, and in turn increase your credit utilization ratio.