Sometimes, we make financial decisions we regret, like opening a new credit card. You may have opened a credit card recently, whether to snag a sign-up bonus or enjoy a more generous rewards program. But if you’re not happy with that card, or if it charges you an annual fee, you may now be looking to close it.
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 impact your credit score
There are different factors that go into calculating credit scores, and closing a credit card touches on two of them.
The first is length of credit history. Having long-standing credit accounts could help raise your score, as it’s a sign of consistency on your part. In that regard, closing a recently opened credit card may not hurt your score all that much, if at all.
Say you opened a credit card six months ago but have three other credit cards that have been open for five to 10 years. 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 utilization. Your credit utilization ratio measures the amount of available revolving credit you’re using at once. The lower that ratio, the more it’ll help your score, whereas a higher ratio — one above 30% — can bring your score down.
If your recently opened credit card didn’t come with a substantial spending limit, then closing it may not impact your utilization all that much. But if losing out on that spending limit will drive your utilization ratio into unfavorable territory, then it could result in credit score damage.
For example, let’s say you owe $3,000 on your credit cards and have a total spending limit of $10,000 between four different cards, including the one you recently opened. That leaves you with a utilization ratio of 30%.
If closing that account shrinks your total credit limit to $8,000, your $3,000 balance will result in a utilization ratio of 37.5%. That’s above the more favorable 30% ratio it was sitting at previously. In this situation, closing a recently opened credit card could end up being a bad thing for your score.
When to keep a newer account open
If you’re not being charged an annual fee on a recently opened credit card, and that card comes with a generous spending limit, then it could pay to keep it around and just not use it, or not use it all that often. On the other hand, there’s no sense in paying a costly fee for a card you won’t get good use out of. In that case, it could pay to work on reducing your credit card balance to improve your utilization ratio and then close out that account as soon as possible — before your next annual fee payment comes due.
