If a credit card has an annual fee, closing it could save you money and having fewer cards in rotation can mean fewer payments to keep track of. However, keep in mind that closing a credit card may impact your credit health.
Here are some important factors to consider before closing a credit card to help you think through whether closing the card is the right move for you:
Your credit card utilization may increase
Your credit card utilization is the ratio of your credit card balances to your available credit card limits.
When you close a card, you reduce your overall available credit card limit. Unless you also reduce your credit card balances, this can increase your credit utilization rate. Many credit scoring models take your utilization rate into account, as it’s one way to help gauge how you’re managing your credit and whether you’ll be able to pay off your debts in the future.
Keeping your overall credit utilization below 30 percent is generally recommended. Lower credit utilization rates typically suggests to lenders that you’re using credit, but not dependent on it.
Your average age of open accounts could decrease
Closing an older credit card account could reduce the average age of your open accounts. In general, credit scoring models look at the average age of all your open accounts to see that you have experience using credit responsibly. If you close a card that is significantly older than your other cards, it could lower your average age of accounts.
While your average age of accounts isn’t typically the most important factor used to calculate your credit scores, it does matter. If it falls, it could negatively impact your credit health.
There’s a lot more to consider before closing a credit card account and plenty you can do to get any credit card debt you may have under control. Check out our in-depth guide about the do’s and don’ts of closing a credit card.