Effect of Cancelling Credit Card on Credit Score

On my previous credit card post, I received the following question:

“Do you cancel your credit cards before the yearly fees kick in? If yes, have you noticed any hits to your credit score?”

Thanks for the question Donnie, I thought it’d be useful to provide the answer as a post, as it might be useful to everyone.

To answer your questions, I do generally cancel credit cards before the yearly fee kicks in, if I’m not actively using the card for spending or other benefits.  I prefer to keep my credit lines to as few as possible.  Truthfully, I do not pay close enough attention to the effect of individual card cancellations on my credit score, but in theory it could hurt your score, as I’ll explain below.  My take on this is that your score may drop a few points (as it does with each inquiry/pull when you apply for a new card), but as long as you’re paying your bills on time and spacing out your applications/cancellations, your score should recover over time.

What is the possible effect of cancelling your card on your credit score?  Your credit score is calculated based on a large number of factors.  A full list is here, but cancelling a credit card is most likely to affect this factor (possibly others too):

  • Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)

Cancelling a card means you no longer have the credit line associated with that card, which in turn increase your proportion of credit lines used (because your total credit lines have no decreased).  So cancelling a card does potentially have an adverse effect on your credit score.   However, as noted on the myfico page, your credit score is based on all of the factors listed, and not just a single one, so the impact is unlikely to be large.

However, you do have several options when it comes to cancelling cards, to avoid decreasing your credit lines.  Obviously, YMMV depending on the specific cards, banks/credit card companies, and your personal history, but I’ll outline my experiences.

First of all, when you call to cancel, there is a good chance the credit card issue will try to incentivize you to keep a credit card.  This can come in various forms.  Sometimes they will waive/or credit the fee (and possibly require you to spend a certain amount or make a certain number of transactions).  Some companies are known to offer your bonus miles or points to retain the card.  It’s always worth asking about any possible retention bonuses.  You could even take the bonus, but reconsider and close the card later (though the card company might not be thrilled by that).

Failing that, if there’s nothing worthwhile offered, many credit card providers can consolidate your credit line with that of another card, and then cancel the card.  By doing that, your total credit limit remains the same, or almost the same, and you would not incur as much of a hit on your credit score.  Another option is try and convert your fee paying card to a non-fee card, which most companies will let you do.  I don’t personally like this approach, unless there’s a non-fee card that I might actually find useful, because then I still have to deal with another open line of credit.  While I prefer to not voluntarily close credit lines, I would rather not deal with having too many open lines to keep track of, and it’s likely I can apply for more credit down the road and get my credit lines to where they used to be.

In summary, when faced with a credit card with an upcoming annual renewal fee:

  1. Call the credit card company and say that you’re thinking about cancelling the card, but you want to see if there are any retention bonuses available.
  2. In the absence of a worthwhile bonus, attempt to combine the credit line on the card you want to cancel with another credit line you have with that provider
  3. If you’re willing to maintain an open credit card, attempt to convert the card to one without an annual fee.