Credit Building > Does closing a credit card affect credit score?

Does closing a credit card affect credit score?

Wollit Team3 minute read · Updated 29th June 2024

Closing a credit card can affect your credit score, even if it may seem like a simple way to switch to a better provider or to deal with a debt problem.

How can closing a credit card hurt my credit score?

Multiple factors influence your credit scores: payment history, credit limit, credit utilisation, address history, etc. Here is how closing a credit card can impact some of these factors.

First, closing a credit card reduces your total credit limit:

This increases your credit utilisation ratio. Credit utilisation means how much of your credit limit you actually use. For example, suppose you have a £2,000 credit card limit between two cards and use about £400. In that case, your credit utilisation ratio is 20%.
But say you cancel one of your cards, with a limit of £1,000. Now, your total credit limit shrinks to £1,000. If you still use £400 in credit, your credit utilisation will now be 40%. Experian recommends keeping it under 25%.
In other words, cancelling a credit card instantly reduces your credit limit, potentially damaging your credit score right away.

Second, closing a credit card may make your credit mix less diverse:

CRAs (credit reference agencies like Experian) and lenders like to see that you can manage different kinds of debt.
So, if you have a mortgage, a personal loan, an auto loan, and a credit card, cancelling the credit card removes one piece of this mix.
This will hurt your credit score as the credit mix makes up about 10%.

Third, cancelling a credit card can also remove an old, healthy credit account from your credit history:

Lenders like to see that you can manage credit without issues over a long period.
When you close a credit card, the credit history with that card is stopped.
Since the length of your credit history is essential to your credit rating, this will also hurt your score.

How does closing a credit card improve my credit score?

Paying your credit card bill on time is a common and easy way of building your credit history, which is what your credit score is calculated on.

But if you have trouble paying off your credit card balance, for whatever reason, closing a credit card can help you avoid maxing out your credit card or missing a future credit card bill—or worse, having the card closed in "default" because you couldn't pay it at all.

These things can significantly hurt your credit score, and they stay on your credit report for six years. Cancelling your credit card can sometimes be the only way to ensure you don't accidentally ruin your credit history.

Cancelling a credit card has another advantage: it can reduce the risk of fraud. This can be useful, especially if you suspect your credit card details have been leaked online. A fraudster could make purchases in your name, potentially making it too hard for you to pay them back. This matters for your credit score – unless you can prove the fraud, the purchases are your responsibility, and any missed payments hurt your credit score, not the fraudster's.

How do I cancel a credit card in a way that doesn't hurt my credit score?

You can't cancel a card just by cutting it with scissors and not using it anymore. You're still liable for any remaining payments and balance. If you don’t pay them, this could lead to missed payments, a default, or even your being taken to court and receiving a CCJ (County Court Judgment).

But if you're sure you want to go through with cancelling one of your credit cards, here's how to do it right:

Pay off your balance or transfer it to another credit card. This is the most crucial step. You can't close a credit card account with a balance. You can let the card provider know you want to cancel it, but they will keep it open (and visible on your credit file) until it is paid off.
Cancel any recurring payments and update your payment information to avoid missing payments with other companies.
Redeem any unclaimed rewards. Most rewards expire after your card is closed, so check your card's terms to see if you need to use your rewards before cancelling.
Tell the card company by calling or emailing their customer service number. Sometimes, you can also cancel through their app.

Once this is done, you might want to add two more steps:

Double-check your credit reports. If you want to avoid taking your credit card provider's word for it, you can comb through your credit reports to ensure they reflect that your card has been closed. A closed account can take up to seven weeks to reflect on a report.
Cut it up. This is a simple but essential step. Cutting up your credit card can help ensure no one tries to use it after it's closed.

Closing a credit card should be an essential decision you shouldn't take lightly. Once done, you'll remove an important credit-building tool.

To replace it and keep building your credit history, consider downloading an app like Wollit.

Wollit is a credit-building app that reports your monthly subscription as a loan repayment to all three credit reporting agencies.

Unlike a credit card, however, with Wollit, you won't risk making a purchase you can't afford or a fraudster stealing your card details. If the only reason you had a credit card in the first place was to improve your credit score, an app like Wollit can be a much better alternative.