There are lots of good reasons to cancel a credit card – like closing cards with high annual fees or joint accounts that you don’t need anymore.
However, if you’re thinking about canceling a card just because it hasn’t been used for a while, then you should consider a few unintended consequences, like the negative impact it could have on your credit score.
Why could your credit score be impacted when you close a credit card?
The algorithms used to create a credit score consider your credit utilization – how much of your available credit you’re using.
Add up the balances on all your credit cards and divide that by the total of all the credit limits on those cards. That’s your credit utilization rate. Anything over 30% could hurt your score.
Cancel the card and your available credit gets smaller. Even if you don't make any more purchases, by losing the credit you had available on that card the cancellation will cause your credit utilization to go up which could make your score go down.
Here’s the math: If the total credit on all your credit cards is $10,000 and you’re carrying a balance of $3,000, that’s a 30% utilization rate. If the credit card you cancel has a $5,000 credit limit and your balance remains the same ($3,000) your available credit drops to $5,000 and your credit utilization will shoot up to 60%.
Consumer Reports suggests a better move: Unless the card has an annual fee, keep the account open - just don't use the card.