How Much Closing a Credit Card Impacts Your Credit Score

While we've discussed the fact that opening a new credit card account probably doesn't impact your credit score (and actually could help it), I've never see anything on what closing a credit card account does to a credit score. That is until now.

Moneyland highlights the story of Rick Draper, a guy who has close to 40 credit cards -- all designed to get him frequent traveler rewards. Here's how he's doing so far:

The mass of points compiled by Draper has allowed him to fly himself and a guest in first class to Buenos Aires, $4,500 worth of free hotels during the trip, and even free top-notch lodging for his family on a vacation in Disney World.

But it's later on in the piece where a nugget of information is stashed. Check this out:

One question travelers like Draper hear all the time is: Doesn’t constantly opening and closing credit card accounts damage your credit score? Indeed, it does. But perhaps not as badly as most people think. Kenneth Lin, from CreditKarma.com, says he himself opens and closes at least one card per year in order to snag bonus miles and cancel the account before annual fees are assessed and that turning over 10 cards in a short period of time is likely to push a good credit score into an average or poor one. But opening and closing one or two per year isn’t going to do much damage:

“You take a five-point [credit] hit but pick up 25,000 bonus miles, and that’s a good trade off.”

So, it looks like there's not much impact at all -- as long as you keep it in moderation (closing only a few, not many.) And with all the big-time credit card bonuses out there it's worth a 5-point his if you can earn $500 or more, isn't it?

This is what I do. I only open/close a few cards each year. This year I'll close two -- the FIA/Schwab card that is closing because it's going away and the Bank of America card they automatically sent me and wanted me to use (but is worth well less than any of the cards I use). I've also picked up two new cards -- the Amex Blue Cash Preferred card (which is top dog in my current credit card strategy and the Chase Sapphire Preferred card which hopefully will get at least half of my family to our cruise port next year (due to a big sign-up bonus.)

So it's finally good to find out what the credit score impact actually is when you close a card. And especially good to know it's not a very big hit at all.

Comments

[Mary Kay]

Both my husband and I each open and close a few cards a year, for the bonus rewards. The last time I checked, not too long ago, my credit score was above 800. Not only that but we don't expect to borrow money in the future.

[Nate]

Wow! I definitely assumed that closing credit accounts would cause a more substantial impact to the credit score. Interesting information. 40 credit cards though? Is that a little excessive? Well the guy is traveling like a king with all the point haha! Have a great day everyone!

[Matt]

Good to know. there is a credit card I have been meaning to close.

[Brent]

This is good to know and something I thought about while reviewing my credit karma account.

Something I have not figured out is how credit utilization affects my credit score. I was giving a 'C' rating on credit karma even though my utilization is at 0%.

From what I see on the website, your credit score is negatively affected if you do not have a 1 - 20% utilization rate?

I charge everything on my card if possible but I have a total available credit card limit on all my cards of over $81,000... should I start cancelling cards I do not use in order to get my limit down and my utilization up?

Any help is appreciated!

[jim]

I agree that people shouldn't be so paranoid about closing a card.

The exact hit to your credit score will depend on the exact situation. I bet the exact hit of closing 1 card will differ if you've got 2 cards versus 12 cards.

If you have a balance on any cards that you carry then closing a card could have a different and larger impact. Closing 1 of multiple cards would lower your credit limit and impact your credit utilization % rate. SO if you carry any balance then closing a card could have more impact.

[jim]

Brent, having 0 debt will not have any negative impact on your credit score. NO you don't want to cancel cards to decrease your limit and increase utilization, that would hurt your score.

You say you charge everything possible? That means that at any given time you may have a balance on your cards for that month which you will then pay off when you get the bill right? My understanding is the credit scoring mechanism may see that current balance and then score you negatively. They don't know if that money will get paid off or if its been carried for months. So they treat it like a debt.

[Brent]

Jim, thanks for the response. I looked into it a little further and it looks like Chase (the card I use to pay for everything and pay off monthly)is not reporting my limit so it makes me look like I have 0% utilization and that is not good according to Credit Karma.

After looking at Credit Karma's Q&A, they mention that Credit companies like to see at least some utilization between 1-20%.

This seems backwards to me but is what is causing me to not achieve an even better credit score.

[Kimberly D]

Wouldn't the impact on your credit score also depend on how long you have had the accounts open before you close them? In other words, I would think that closing an account that you have had open for a year or so would have a smaller impact than closing an account that you have had open for 15+ years. Isn't average length of accounts a factor in determining your credit score?

[Kevin @ Debteye]

I think a ton of people have the misconception that closing an account will damage your credit. I had a discussion with the guys @ Creditnet.com and closing an account (regardless if you do it or the creditor does it) has a negligible impact on your credit score.

[Briana @ Prairie EcoThrifter]

Great to know it's not a big hit. When I pay off my credit cards, I may close 1 or 2, especially if the limit/interest rate don't align with my goals anymore. One I know I'll be closing is my Goodyear credit card I was encouraged into opening last year for car repairs. One of the biggest financial mistakes I've ever made.