It can be tempting to close credit cards with no balances, especially if you have a bunch of unused cards in your wallet or drawer. But before you make this choice, you should carefully think about how it might affect your credit score and overall finances. In this article, we’ll talk about the pros and cons of closing credit cards with no balances to help you make an informed decision.
How Closing Accounts Impacts Your Credit Score
One of the biggest factors to consider is how closing accounts affects your credit utilization ratio. This ratio compares your total outstanding balances to your total available credit limits across all cards. The lower your utilization, the better for your credit score.
For example let’s say you have
- Card A with $1000 limit and $0 balance
- Card B with $2000 limit and $500 balance
Your total credit limit across both cards is $3000 and your total balance is $500. So your utilization ratio is $500/$3000 = 17%.
If you close Card A, your total limit decreases to $2000 but your total balance remains $500. Now your utilization is $500/$2000 = 25%. Even though your balances didn’t change, your utilization jumped because you lost available credit.
More credit use makes lenders think you are a bigger credit risk, which can lower your score. That’s why it’s generally recommended to keep unused cards open. You might not notice a big difference in your credit score if your credit is already very good, though. Those with fair or poor scores have more risk.
Another factor is your credit history length. Closing newer accounts doesn’t impact this much, but giving up an old card means forfeiting that positive record. Closed accounts stay on your report for 10 years though.
Finally, having available credit cards signals financial stability to lenders. It makes you less flexible when you close accounts, especially if you need new credit soon after.
When Closing Accounts Makes Sense
Despite potential scoring impacts, there are reasonable situations where closing a zero balance card is prudent:
-
The card has an annual fee. Cancelling the card can save you money if you don’t use it enough to justify the fee.
-
You want to avoid temptation to overspend – For those prone to piling on debt, removing unused open lines provides peace of mind.
-
You’re undergoing a major life change – After events like marriage, divorce, death of a partner, etc., joint accounts should be closed.
-
You’re concerned about security – If your card was compromised, shutting it down can prevent future fraudulent charges.
-
You have marginal credit – Consumers with fair or bad credit scores often have high balances relative to limits. In this case, closing an unused card reduces temptation without greatly altering the utilization ratio.
How to Close Cards the Right Way
When you’ve decided to close a credit card properly, follow these steps:
- Pay the balance down to $0 so no fees trigger upon closure.
- Redeem any rewards or perks accrued on the card.
- Contact your card issuer by phone to cancel and request written confirmation.
- Shred your card and discard related materials securely.
- Check your credit reports to verify the account is closed.
Afterward, your credit line and history with that account will remain for 10 years before falling off reports. Monitor your credit periodically to ensure no errors occur during this time.
Weighing the Pros and Cons of Closure
Before making your decision, carefully weigh the pros and cons of closing credit cards with zero balances:
Pros
- Eliminates temptation to overspend
- Avoids annual fees on unused cards
- Frees you from joint account obligations
- Provides peace of mind if security is a concern
Cons
- Can increase your credit utilization ratio
- Reduces total available credit
- Forfeits positive history if card is old
- Decreases credit stability
Generally, closing credit cards causes more harm than good for your credit score. But your personal financial situation should drive the choice above all else. If cutting up a card improves unhealthy habits or simplifies a financial transition in life, the scoring impact may be worth it.
Exercising Restraint Without Closing
For those torn between keeping accounts open and avoiding temptation, alternatives exist:
- Freeze cards inside a block of ice to prevent impulse spending
- Cut up cards but keep the accounts open
- Ask issuers to lower credit limits on unused cards
- Set up account alerts to monitor charges
- Carry only one credit card for emergencies
With caution and restraint, you can maintain the benefits of keeping accounts open without worrying about overspending.
The Bottom Line
Closing credit cards with zero balances seems harmless but can actually jeopardize your credit standing in multiple ways. Think twice before shutting down unused accounts unless special circumstances apply. With prudent financial practices, you can enjoy both open credit and responsible spending habits. Make informed choices and your credit will take care of itself over time.
Frequently Asked Questions
Closing a card usually impacts two credit score factors: credit utilization ratio and average age of credit.
When you cancel a card you lose access to that card’s credit limit, so your overall credit limit goes down. Unless you carry a zero balance on all your credit cards, this change leads to a higher credit utilization ratio which can negatively impact your credit score. This is especially important if the increase in your credit utilization will surpass 30% of your available credit.
Closing a credit account can impact your credit score, but there’s no one-size-fits-all formula to determine how many points your credit score will change.
The exact amount your credit score will change when you close an account could depend on a few factors like payment and credit history, how many other credit card accounts you have and their average ages, as well as your credit limit.
Some cardholders want to close a credit card with a zero balance if they don’t plan on making purchases with that credit card any longer. Others want to close a credit card account as soon as they make the last payment. This may be a good financial decision for cardholders who may be tempted to overspend using credit cards, since closing the account could help you limit your spending. But, regardless of the reason, closing a credit card could impact your credit score. So, if there’s no annual fee on the card or any other pressing reason to close the account, you may want to keep the credit card open indefinitely so you don’t hurt your score.
Keeping a credit card with a zero balance open may help you improve your credit score, since it can lower your credit utilization ratio and could increase your average age of credit. It also may serve as a safety net for unforeseen or emergency expenses. However, under certain circumstances, closing your account may make more sense for your financial well-being.
1 “What Is a VantageScore Credit Score?,” Experian
2 “What Should My Credit Utilization Ratio Be?,” myFICO
5 “How Credit Cards Can Affect Your Credit Score,” Experian
8 “Should I Cancel a Credit Card With an Annual Fee?,” Experian
9 “I want to close my credit card account. What should I do?,” Consumer Financial Protection Bureau
SHARE
Michael Grace is a personal finance and technology freelance writer based on Long Island, N.Y. All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
How a Credit Card With No Balance Affects Your Credit Utilization Rate
The amount of credit you use in relation to the amount of money creditors are willing to lend you is your credit utilization ratio. Your credit utilization ratio is one significant factor used to determine your credit score. It accounts for 30% of your credit score under the FICO scoring model and is labeled “highly influential” under the VantageScore model.1 It’s recommended you keep your credit utilization ratio below 10%.2
If you choose to close a credit card with a zero balance, your total credit limit will decrease. As a result, your credit utilization ratio will increase, particularly if you carry a balance on other credit cards.3
For example, let’s say you have three credit cards with a $5,000 limit on each for a total credit limit of $15,000. If you have zero balance on one card and a total balance of $5,000 across the other two, that’s a 30% credit utilization ratio – the upper limit of the recommended zone. So, if you close the card with a zero balance, your total credit limit drops to $10,000 and the same $5,000 balance is now a 50% utilization ratio, as seen in the accompanying table. That’s a situation that could shave points off your credit score.
Impact of Closing Zero Balance Credit Card on Credit Utilization Ratio
| Credit Cards | Credit Limit on Each | Total Credit Limit | Credit Balance | Credit Utilization Ratio |
|---|---|---|---|---|
| 3 | $5,000 | $15,000 | $5,000 | 30% |
| 2 | $5,000 | $10,000 | $5,000 | 50% |
Should I Close a Paid Credit Card Or Leave It Open?
FAQ
Should you close a credit card with a zero balance?
But if you didn’t have any late payments, debts, or other problems with the account, your credit score should be back to normal in a few months. Some people want to close a credit card account with no balance if they aren’t going to use it to buy anything anymore.
Can a zero balance affect my credit score?
Unless you carry a zero balance on all your credit cards, this change leads to a higher credit utilization ratio which can negatively impact your credit score. This is especially important if the increase in your credit utilization will surpass 30% of your available credit. How many points will my credit score drop if I close a credit card?.
Should you keep open a credit card with no balance?
In certain scenarios, it may make sense to keep open a credit card with no balance. Other times, it may be better to close the credit card for your financial well-being. You finally sent in that last payment and your credit card has a zero balance.
How important is a zero balance on a credit card?
It accounts for 30% of your credit score under the FICO scoring model and is labeled “extremely influential” under the VantageScore model. 1,2 Experts recommend keeping your credit utilization ratio below 30%. If you choose to close a credit card with a zero balance, your total credit limit will decrease.
Why should you keep a zero-balance credit card open?
The main reason to keep a card with a zero balance open is that closing an account lowers the total amount of credit you have access to, which makes your credit utilization rate go up. The ratio of your outstanding credit card balances to your total credit limit is an important factor in determining your credit score.
What happens if you close an account with a zero balance?
If you close an account with a zero balance, it may initially hurt your credit score. But, if there were no late payments, outstanding debts, or other negative marks on the account, your credit score will likely return to normal within a few months.
Is it better to close a credit card or leave it open with zero balance?
In general, keeping it open is probably best for your score, as long as you keep paying it down and don’t put more charges on it exacerbating the situation.
Is it better to close a credit card or let it go inactive?
Keeping an unused credit card open can benefit your credit score – as long as you follow good financial habits. If an unused credit card tempts you to unnecessarily spend or has an annual fee, you may be better off canceling the account.
What is the 2/3/4 rule for credit cards?
How badly does closing credit cards hurt your credit?
Closing credit cards can lower your score temporarily. It decreases your credit availability, may shorten the length of your credit history, and may increase your total utilization if you have other cards with balances. This is temporary and shouldn’t be a huge negative impact.