Editorial Policy

How to Close a Credit Card the Right Way

Eva Norlyk Smith Ph.D.

April 26, 2012

QHi Eva,

I have three credit cards. Two of them are just regular cards — I’ve had one for 10 years ($3,000 limit) and the other for just under a year ($5,000 limit). The third is a Southwest rewards card ($2,500 limit) that I’ve had for five years.

I just moved to a city Southwest doesn’t fly to, so I have no reason for this card anymore. Also, it has an annual fee. I want to cancel it, but I don’t want to hurt my credit. I don’t have a car loan, a mortgage or any other loans, so these cards are my only credit. I’m afraid that by getting rid of my second-oldest card, my credit will take a hit. I’ve always paid off the Southwest card on time. But the 10-year-old card has a balance of $2,000 right now. The 1-year-old card has a zero balance (because it’s just for emergencies). Should I pay off the older card before canceling the Southwest one? What do you think I should do? — Logan

ADear Logan,

It’s true that the general rule is to not close credit card accounts because it can hurt credit scores. However, there are exceptions, and carrying a high-annual-fee rewards card that you no longer use is one of them.Ask Eva

How you go about the process of closing the account does make a difference in how much it will affect your credit score, however. Since the Southwest rewards card is your second-oldest credit card, closing it will have some impact on your score. But there are ways to minimize the ding, so let’s take a look at those.

First off, there are two ways that closing a credit card account may hurt your FICO score: by increasing your credit utilization and by shortening the length of your credit history. Credit utilization is a measure of the amount owed on your credit cards in relation to your available credit. This ratio accounts for 30 percent of your FICO score. So, if you close the Southwest card, you’ll wipe out some of your available credit — and the debt you do have will be bigger in comparison to the total amount of credit available to you.

Length of credit history, on the other hand, accounts for only 15 percent of scores. And the good news is that, because your Southwest credit card is not your oldest credit card, closing it will hurt your score less.

Now let’s look at how you can boost your score in other ways. Right now, you’re making a big mistake that is likely pulling your score down: You’re keeping a high balance on the 10-year-old card. A $2,000 balance on a card with a $3,000 credit limit puts your credit utilization ratio at 66 percent. That’s way too high. Experts generally recommend keeping utilization below 30 percent, and ideally below 10 percent.

Credit utilization is calculated both within each credit card account and across all your credit card accounts. So while your total credit utilization currently is only at 20 percent, the fact that you have that high utilization on one of your credit cards is more than likely hurting your score.

The good news is that a few simple changes could boost your credit score — and counteract the impact of closing the rewards card. Here are some suggested steps to take:

  1. Pay off as much of the $2,000 balance as you can. Of course, if you can wipe out that $2,000 balance completely, that’s always the best way to go.
  2. Make a balance transfer. Make a full or partial balance transfer of the remaining balance on your oldest card to your 1-year-old card with the zero balance. It is better to have small balances on many cards than a high balance on one card.
  3. Ask for a credit limit increase. Once you have zeroed out (or dramatically reduced) the $2,000 balance on your oldest card, call the issuer to inquire if you’re eligible for a credit limit increase. A credit limit increase will increase your overall available credit and counterweigh any hit to your credit utilization from closing your Southwest card.Most card issuers will raise the limit on credit cards once a year for cardholders who have been with them for a while and who pay their bills on time. Be sure to ask after you make the balance transfer, however, as card issuers will be less likely to increase limits on cards with a high balance.

Once you’ve gone through these steps, you should be able to close your Southwest credit card without much of a dent in your credit score.