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Does credit cards closure spoil credit history?

19.05.2021
131
7 min.

If you are thinking about a credit card termination then the potential benefits and risks of closing should be taken into account. The procedure of a credit card closure can be as easy as just contacting the bank and asking to terminate the card, you should primarily consider many variables like balance unsettled, possible alternatives to closing and also if a closure affects credit rating in a negative manner.

Does credit cards closure spoil credit history?

The ways a credit card termination affects a loan

Closure of credit cards can affect loans depending on the number of other opened credit accounts and how responsibly they are used. Knowing the way credit score operates can help reduce the impact a terminated credit card possibly have on your loan.

Below are two main ways closed credit cards affect loans.

A card termination can increase a loan utilization rate

The loan utilization rate is 30% of your FICO credit rating. Since this is a current balance to the available loan ratio a decrease in the amount of loan available (due to a credit card termination) can lead to an increase in the loan utilization rate and a decrease in credit rating.

Closure of the oldest card will probably shorten the duration of your credit history

This constitutes as much as 15% of FICO credit rating. Influence on credit score will probably not be noticed immediately as credit accounts closed still contribute to FICO credit rating until they are excluded from a credit report which can actually happen in 10 years.

The exact ways a card closure harms credit history are rather difficult to identify. If a holder proceeds using other credit accounts wisely i.e., making monthly payments on time, keeping a low loan utilization rate, regularly repaying balances, etc., then a credit rating is unlikely to be hit hard. Applicants having positive credit history are more likely to still have the same rating even if after one card termination.

5 reasons to leave a credit card open

Sometimes terminating a credit card can be avoided and below are 5 reasons why you should leave it open:

  • Credit rating is on the verge of a good range and to risk losing credit scores is not what you want
  • You are planning to apply for a mortgage and it's not worth losing credit points
  • The credit to be closed is the oldest one and you aren't willing to take risk of shortening credit history duration
  • Credit cards possess several outstanding balances and terminating one will reduce a loan available to the point of a seriously negative impact on a loan utilization rate
  • You really don't have a sound reason to close a card (for example, you do not use it as often as other ones)

5 reasons for terminating a credit card

Several very solid reasons for closing credit cards exists and below are 5 of them:

  • You are unable to utilize it responsibly i.e., you miss payments or are worried about running into a balance difficult for repayment
  • You are a holder of a retailing credit card but don't purchase there anymore
  • You are breaking up with the partner and subsequently have to terminate your joint account
  • You own an credit card for airlines, don't employ their service and don't intend to keep the card open and cover high annual charges
  • You hold a premium credit card but it does not match your buying habits and lifestyle anymore. Then no need to pay an extremely high per annum fee

The proper way to terminate a credit card

It is important to know the steps required for credit cards closing. The best way is to:

Redeem (or redirect) outstanding balance

In case of closure of an account of a credit card containing an outstanding balance it is necessary to redeem or transfer the debt first. Terminating a card with a balance does not work out because you cannot completely close an account while owing money to the lender. The balance has to be redeemed of transferred to another appropriate credit card.

Provided you are going to terminate a credit card containing a zero debt then you can skip this step and it is worth waiting for at least one full discharge cycle after your card reaches zero balance to ensure you didn't forget about any final payments or interest which may arise.

Use the remaining rewards

When following the procedure of a credit card providing bonuses closure firstly you should utilize rewards earned as they eliminate after the card's closure.

Optionally you can transfer rewards between different cards belonging to the same reward system. For instance, if you hold 2 credit cards providing travel points which can be transferred from the card you are planning to close to the one kept open.

Contact the company which has issued the credit card

If you've cleared the balance and rewards then it's time to contact the issuing bank, at the back of the card there is the necessary phone number. You need to request if the current balance is $0 and an account cancellation after.

The issuer may offer an incentive for leaving an account open, like a lower annual percentage rate or an opportunity to receive rewards. And other issuers can simply pressure you not to close the account. You have the right to decide whether to accept any offers but shouldn't be persuaded to hold the credit card you would rather have closed.

Send a registered letter

When customer service has cancelled your credit card it's better to duplicate the request by sending registered letter to the issuing company. Thus, you reaffirm the decision to terminate the account and you should also ask for an e-mail message confirming at the time of cancellation there was account balance of $0 and the credit card has been closed.

Keep track of credit reports

After getting an e-mail message confirming the account closure credit reports should be checked with Experian, Equifax and TransUnion which are 3 main credit bureaus. It is essential the credit card not to be listed as an active one and pointed to be closed upon customer's request.

Eliminate the card

Destroying the card is highly important for finishing cancellation as it helps protect from identity theft, fraud and prevent possible canceled credit card using for making purchases.

Options to your card closure

Termination is not the only way to resolve the situation especially given the potential harm for your credit rating.

It's worth holding two different credit cards – the oldest and with the highest limit. It can restrict a possible harm to the duration of credit history and a loan utilization rate.

In case you have a credit card that you don't use much but are looking for ways to make it more profitable, here are some suggestions. First of all, you should consider switching to another one of the same issuer. For that reason current offerings check is worthy in order to find a comparable credit card that works best for you. Some issuers let shift accounts or “change products” without seriously interfering with credit history. But you most likely won't be able to benefit from new customer registration bonuses in case of switching the same issuer's credit card products.

Provided a credit card to be terminated has a high percentage rate then it is better to utilize the one with a lower rate for balance transferring. It enables leaving the card open and paying the balance off at a lower cost. Making small purchases each month and then paying in full can help maintain an old card active.

If you cannot stop yourself from spending funds, you can put your credit card aside or destroy it at least until you finish redeeming the debt.

Terminated credit cards are not immediately deleted from credit reports and remains there up to 7 years (in case of a negative result) or about 10 years (in case of a positive result). While the account is on reports, it counts towards an average loan term and accumulates the account age value at VantageScore as well as FICO models of credit scoring. For losing value for card expiration it must be removed from reports.

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