Personal Finance

10 things to know before closing a credit card

US News & World Report
Geoff Williams
Simon Dawson | Bloomberg | Getty Images

You could call it the tale of two credit card holders. In the last year, Craig Fuller, owner of a company called TransRisk, in Chattanooga, Tennessee closed a credit card and saw his credit score plunge from 760 to the mid-600s. And then there's Nanette Miner, an educational consultant in Mount Pleasant, South Carolina, who closed three credit card accounts in May. Her credit score fell about 30 points, not a fun drop, but nothing like Fuller's experience.

So why did Fuller's score drop so much compared to Miner's? It's all in the details. If you're going to close a credit card account, here are 10 things you need to know.

Age matters. Not your age; your credit card's.

"The average age of your open accounts makes up for 15 percent of your overall credit score," says Randall Yates, CEO of The Lenders Network, an online mortgage marketplace specifically helping people with credit issues. "So if the card you close has been open for a long time it really is better to keep it open, otherwise your score will be negatively affected."

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In Fuller's case, he closed a credit card that he had since 1997 when he was in college. He has six other credit cards and around eight store credit cards, and the cards are all in good standing. But most of them, he says, are less than four years old. So when he got rid of his oldest credit card, the average age of his credit cards dropped from seven years to 3.8. To a lender, that long history of having nothing bad happen with your oldest credit card – that's now gone and irrelevant.

How much credit is available also matters. Another reason Fuller's credit score plunged was that the available credit on his old card, once he closed it, was gone. As you may know, credit utilization ratio is important. To put it in simple terms, if you have a credit card limit of $1,000, and you have $300 or less that you've borrowed on the card, then your credit utilization ratio is low, and your credit score climbs. If you've borrowed $993 with your $1,000 available credit, lenders don't like that, and your credit score can drop significantly, especially if this happens frequently. Fuller had a lot of available credit that disappeared, and so his credit score really took a hit.

That annual fee matters. Before you think to yourself, "OK, get a credit card and keep it forever," rethink that mindset. If you have a credit card with an annual fee, and you don't want to use the card, you should get rid of it. Maybe not shortly before you buy a house or a car, when you need stellar credit to get a great loan. But any other time, yes, it makes sense to close the card, and it shouldn't be too long before your credit score climbs, provided you continue to pay your bills on time.

Think about rewards. Do you have a bunch of rewards points accrued on a credit card that you're thinking of closing? Redeem them first, otherwise, you'll likely lose them.

A credit card may close on its own eventually if you don't use it. This is good to know if you have unused open credit cards. For what it's worth, Yates says that when he wants to close a credit card, provided there's no annual fee, he just cuts it up.

"I don't call the credit card issuer. It stays open until they decide to close it due to inactivity," he says.

Something to keep in mind: Consumer credit cards are no longer allowed to charge inactivity fees, but some business credit cards do have them. In the latter case, just close the account.

Pay off the balance before closing the account. Sure, this is the most obvious statement in the world, but don't forget.

Of course, if you have fallen way behind on your credit card payments, some cards will close your account, with the balance still on there. You're still (obviously) liable for paying it off, though.

Think about automatic payments. Maybe you've been using the credit card to pay off your car insurance or cable bill every month?

"Don't forget to shift all automatic monthly payments to a different card, to avoid the risk of missing bills and getting hit with late fees," says Kimberly Palmer, a personal finance writer at NerdWallet, author of "Smart Mom, Rich Mom" and a former U.S. News & World Report editor.

If you like the company but don't like the card, there might be another alternative. Palmer suggests calling the credit card and asking if they will consider dropping the annual fee, if that's what is bothering you, or letting you transfer to a different card without a fee. (Sometimes when you switch to another card but with the same company, you won't lose the age of the account; you'll want to talk that over with customer service, however.)

Verify that you've closed your account. First, it can actually take a month or two before the account is closed, so that's something to be aware of. But also, mistakes on credit reports are fairly common. The Federal Trade Commission did two studies, in 2012 and 2015, that found credit reports are frequently riddled with mistakes. The 2012 study concluded that one in five consumers are likely to have at least one error on one of their three credit reports. It also found that 20 percent of the consumers who identified errors on one of their three credit reports and had them fixed saw their credit score go up.

So you'd do well to make sure that when you've closed a credit card account, it really is closed.

Your willpower is a factor, too. If you can't use a particular credit card without maxing it out, and you feel you should close the account, then any financial counselor or personal finance expert will tell you to close the credit card account as well. Palmer, for instance, recommends this course of action if you're overspending.

And if your credit score goes down, so what? Seeing your credit score descend a little or a lot is far better than going deep into credit card debt and being unable to pay it back, in which case, you're stuck in a financial mess, and your credit score will still fall.