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Some months ago reader Jana asked the question, “if the [annual fee] negotiations go nowhere: wouldn’t it negatively affect my credit score if I cancel cards frequently and open new accounts?” Her question is in regard to what the impact will be to her credit if she doesn’t get a reasonable retention offer or statement credit for a credit card and ultimately decides to close the account.

In short, it depends. Closing the card may impact her credit negatively, but it depends on several factors. I suspect that it will likely have little to no effect in her case. Let’s explore what the potential implications are.

What factors influence your credit score?

Before moving on to the reader’s question about it it is bad to cancel a credit card, let’s quickly review the factors that influence your credit score. Your credit score is created from several different elements:

  • 35% payment history
  • 30% amounts owed
  • 15% length of credit history
  • 10% new credit inquiries
  • 10% types of credit accounts

All of these are combined by some black box algorithm into a number between 300 and 850. A higher score means you are a less risky lender, and creditors are more likely to approve you for new accounts and offer you higher credit limits.

Jana’s question can essentially be split into two parts: “is it bad to cancel a credit card” and “is it bad to frequently open new accounts”. Let’s address cancellation first.

Is it bad to cancel a credit card?

Canceling a credit card could negatively impact Jana’s credit score in a couple ways:

  1. It could cause her utilization rate to jump. Say Jana has three credit cards. The first has a $500 balance and a $1,000 limit. The second has a $300 balance and a $800 limit. The third has a $200 balance and a $3,200 limit. If she closed the third credit card, her utilization rate would jump from 20% to 44%. It’s best to keep your credit utlitzation below 20% to maintain the best credit score. Closing the card could have an immediate negative impact on her credit score.
  2. It could cause her average age of accounts to drop. One of the other factors of your credit score is the length of time your credit accounts have been established. Closing a credit card that has a long history can be very detrimental to your credit score. If Jana has had this card for a while, closing it could negatively impact her credit score. This is the primary reason it is bad to cancel a credit card that has a long history. You want to keep these old accounts open! Conversely, if this is Jana’s newest account, her average age of accounts could actually rise if she closes it.

I have some “keeper” credit cards that I am never canceling. They include the first credit card I ever got with my local credit union, and an account on which I am a jointly liable with a friend. Since he got the card years before I got my first card, my credit report has positive history since I was 13. We both know that canceling that card would be a mistake.

Canceling a credit card doesn’t really impact the other factors much. Your payment history for closed accounts stays on your credit report for years, so closing a card doesn’t change that. Neither would it change the type of credit much, unless it was her only credit card.

So is it bad to cancel a credit card? Possibly. But I am guessing it wouldn’t affect Jana much.

Is it bad to cancel a credit card?

What about opening and closing younger accounts?

I suspect that Jana is more concerned about opening new accounts for a sign-up bonus, then closing them within a year or two. In this specific case, she would be closing a fairly young credit card account. This would likely not have much of an effect on her credit score, unless it seriously changed her credit utilization.

What would impact her score more is opening new accounts frequently. Applying for a new card would cause add a new hard inquiry to her credit report, and if she was approved, she would have a brand new account that would reduce her average age of accounts. The flip side of this is that it would increase her total overall credit available, which would in turn reduce her utilization ratio. Personally, I find opening new accounts to impact my score more than canceling a card.

I can anecdotally say that I have applied for and been approved for a couple dozen new cards over the past couple years. I’ve also canceled several. My credit score has dropped all of 20 points since I started “churning”, and has since remained fairly level. It dips every time I apply for a few new cards and then rebounds a couple months later. I am opening and closing accounts all the time, and I don’t really see much of an impact. This leads me to conclude that it isn’t bad to cancel a credit card. But I am not a credit or banking expert. This is just my experience.

Are there other implications if you cancel a credit card?

Personally, impact to my credit score is far less concerning to me than scrutiny by the banks when it comes to canceling credit cards frequently. Starting in 2015 I really hit the churning game hard. I’ve since tried to ease back a bit, and I try to keep some accounts open to play right by the bank. I’ve also gotten my first premium credit card that I plan on keeping.

At the end of the day, I certainly want to get outsized value from my cards, but I don’t want to sour my relationship with Chase, Amex, Citibank, BofA, or any other financial institution.

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