Should You Close a Credit Card with a Zero Balance? (2024)

5 Min Read | Updated: August 15, 2023

Originally Published: August 4, 2021

You finally sent in that last payment and yourcredit cardhas a zero balance. After you’ve congratulated yourself for paying it off, you plan to call the lender and close your card.

But before you do, it’s important to note that closing down a card with a zero may not be the best move for your credit score. Let’s explore some situations where closing down a credit card with no balance may, or may not, be a good idea.

The amount of credit you use in relation to the amount of money creditors are willing to lend you is yourcredit utilization ratio. Your credit utilization ratio is one of the biggest factors used to determine yourcredit score. 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. As a result, your credit utilization ratio will increase, particularly if you carry a balance on other credit cards.

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 something that could shave points off your credit score.

Impact of Closing Zero Balance Credit Card on Credit Utilization Ratio

If you plan to apply for additional credit for a big purchase – such as a mortgage, home equity line of credit, or car loan – within a year after paying off a credit card, keeping it open with a zero balance may strengthen your credit score. Generally speaking, you would show a lower credit utilization ratio, longer age of credit, and strong payment history, all of which could contribute to your credit score. It also may provide a safety net to help pay for any emergency or unplanned expenses, such as medical care or car repairs.

It may be helpful to know that after a long period of inactivity, sometimes a credit card company may lower your credit limit or even close your account. Using that credit card for automatic payments on small recurring expenses, such as a streaming service or gym membership, is one way you can avoid that.

Sometimes closing a credit card with a zero balance could make sense.

Here are some situations where you may want to consider closing that zero-balance card:

• High annual fee:If your credit card includes a high annual fee, experts suggest you weigh that charge against the perks and benefits of the card. For example, paying the annual fee may be worth it if you typically receive and use a reward such as a free hotel night or companion airline ticket. If the annual fee offers benefits you don’t use, you may be better off closing the card.

• Temptation:Generally speaking, your overall financial wellness should outweigh a temporary drop in your credit score. If keeping the credit card open creates too much temptation for you to spend, it may be better to close the account.

• Data breach:If your card issuer suffers a data breach or you fall victim to identity fraud, call your credit company to discuss your options. It may make sense to close the account, even though the card issuer will typically provide a new credit card number for the same account – which doesn’t affect your credit score

If you opt to close your credit card, it’s a good idea to follow these steps:

1. Redeem all unused points and rewards on your account.
2. Pay off your balance.
3. Switch any recurring payments you wish to keep to another card.
4. Call the card issuer, confirm the balance is zero, and then inform them that you’re closing the account. Alternatively, you may be able to cancel online.
5. As a backup, it’s good practice to mail a certified letter to the card issuer that you’ve closed the account and request a confirmation letter. Many issuers send such a letter as part of their process, regardless.
6. A month or so later, check your credit reports to confirm the account appears as closed and with a zero balance. If you note any incorrect information, reach out to the credit reporting agency.
   

What happens when you close a credit card with zero balance?

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.

How many points will my credit score drop if I close a credit card?

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 depends 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.

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.

How long should you wait to close a credit card

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.