Sometimes we make financial decisions that we regret, like opening a new credit card. You may have opened a credit card recently, either to get a sign-up bonus or to take advantage of a more generous rewards program. But if you’re unhappy with that card, or it’s charging you an annual fee, you may be looking to close it now.
In some cases, closing a recently opened credit card could hurt your credit score. Here’s how to know what consequences to expect.
How Credit Card Closures Can Affect Your Credit Score
There are various factors that go into calculating credit scores, and closing a credit card affects two of them.
The first is the length of the credit history. Having long-standing credit accounts could help boost your score, as it’s a sign of consistency on your part. In this regard, closing a recently opened credit card may not hurt your score, if at all.
Say you opened a credit card six months ago, but you’ve had three other credit cards open five to 10 years ago. From a credit history perspective, closing that recently opened card shouldn’t really matter.
But there’s a second way closing a credit card could impact your credit score, and it has to do with credit usage. Your credit utilization ratio measures the amount of available revolving credit you are using at one time. The lower this ratio, the more it will help your score, while a higher ratio – above 30% – can lower your score.
If your recently opened credit card didn’t have a substantial spending limit, closing it may not have much of an impact on your usage. But if losing that spending limit drives your utilization rate into unfavorable territory, it could lead to credit score damage.
For example, let’s say you owe $3,000 on your credit cards and you have a total spending limit of $10,000 between four different cards, including the one you recently opened. This leaves you with a 30% utilization rate.
If closing this account reduces your total credit limit to $8,000, your balance of $3,000 will result in a utilization rate of 37.5%. That’s above the more favorable ratio of 30% it was in before. In this situation, closing a recently opened credit card could end up being bad for your score.
When to keep a new account open
If you don’t pay an annual fee on a recently opened credit card and that card comes with a generous spending limit, it might be worth keeping it and not using it, or not using it. use often. On the other hand, it makes no sense to pay expensive fees for a card that you won’t benefit from. In this case, it may be beneficial to reduce your credit card balance to improve your utilization rate, and then close that account as soon as possible, before your next annual fee payment is due.
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