Think Twice Before You Close a Credit Card

Paying off high-interest credit card debt is an important step toward financial freedom, and Americans have taken this standard personal finance advice to heart. According to data from the Federal Reserve, revolving credit balances (primarily credit card debt) dropped more than 11% from 2019 to 2020. Analysts believe the decline stems from a combination of spending cutbacks during the pandemic and billions of dollars in stimulus checks, which many consumers used to pay off debt.

If you find yourself with one or more paid-off credit cards taking up wallet space, should you close your accounts for good?

Credit-utilization math. Most experts agree that you should hold on to a paid-off credit card, even if you’re no longer using it. FICO scores, which most lenders use, are calculated based on five factors with varying weights. Your payment history is the most important factor, accounting for 35% of your score, but your credit-utilization ratio—the amount you owe as a percentage of your total available credit—also has a heavy impact on your score, at 30%.

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Say you have total available credit of $10,000 split evenly between two cards. One card has a balance of $2,500 and the other has a zero balance because you paid it off. Your credit-utilization ratio is 25%—a desirable amount because most credit experts recommend keeping the ratio under 30%. If you were to close that zero-balance card, though, your ratio would jump to 50%, which would hurt your credit score.

In addition to doing the math with your own accounts before you close a card, you also need to give some thought to why you no longer want the card, says credit expert Beverly Harzog, author of The Debt Escape Plan. Harzog says people most often consider closing a credit card when the rewards aren’t generous enough to justify the annual fee or when they want to remove a temptation to run up more debt. But you may not need to close a card to address those issues.

New card, same issuer. Cards with annual fees often offer rewards—but at a steep price. Such cards will typically cost you about $100 a year, but some can run as high as $550 (see Best Rewards Credit Cards).

If you are reconsidering a card with a high annual fee, ask the issuer if it has a no-fee (or low-fee) card with similar rewards and credit limits you can switch to. If you’re approved, you won’t lose the credit history attached to the old card, and your credit-utilization ratio won’t be affected.

If you can’t find a card to switch to with the same issuer, apply for a new card with a similar credit limit before canceling the old card. That way, your credit score won’t take a prolonged hit, because the amount of your available credit will remain the same.

If want to remove the temptation to spend, store the card in a safe place where you won’t come across it very often. Or just cut it up. Once you’ve done that, prevent crooks from using it by going to your credit card’s website or app and placing a lock on your account.

“If you truly believe canceling a card is in your best interest, do it, and just ride it out,” Harzog says. The hit to your score will be temporary as long as you continue to keep your card balances low and pay your bills on time.

Rivan_Stinson@kiplinger.com