Will it Affect My Credit Score If I Cancel My Credit Card With a Balance?

According to Fair Isaac, most American consumers have 13 credit accounts reported to credit bureaus. These include both credit cards and installment loans. For those consumers who are trying to curb spending by using credit cards less, canceling a credit card might not be the wisest choice. You should first consider how canceling a credit card could damage your credit score.

Increased Interest Rate

If you are thinking about canceling a credit card, keep the account open until you pay off the balance in full. Letting a card issuer know that you intend to cancel the account is the wrong thing to do. Card issuers often raise the interest rate to the maximum amount allowable when you cancel a card that still has a balance. You don't want a higher interest rate lowering your credit score, thereby increasing the interest rates you pay on your other credit accounts.

Decreased Line of Credit

Canceling a credit card decreases the amount of your available credit. Having a lower line of credit could negatively impact your credit score. When you close a credit card account, the outstanding balances on your other cards loom larger because you've reduced the total amount of credit accessible to you. Closing an account usually is not a sensible move, especially if the card still has a large amount of unused credit. On the other hand, paying down credit card balances improves your credit score. Reducing the amount of debt you owe appears much more favorably on your credit report than decreasing your line of available credit.

Length of Credit History

A long credit history increases your credit score, especially when you have a positive payment history. Bankrate.com recommends keeping your oldest credit card account open. Canceling an old card shortens your credit history, which can lower your credit score. Even though creditors normally do not remove a cancelled account from your credit report immediately, in time the account will no longer show on your report. If you want to reduce the number of credit cards you carry, cancel an unused credit account that has a zero balance. This won't hurt your credit score.

Applying For a Loan

If you are thinking about applying for an auto or mortgage loan in the near future, this might not be the time to close any credit card account. Consumers with healthy credit don't have to worry as much. But if your credit is marginal, a drop in your credit score of just a few points could disqualify you for a loan. Even if you are approved for a loan, a lower credit score will cost you more money because you will be paying a higher interest rate.