There are two factors that impact your credit score when you close a credit card. One of them impacts it in the short term and other one in the longer term. The good news is that the factor that impacts it in the short term can be easily managed and you can close out the card on which you pay a high fee with no impact on your credit score at all.
Short term factor
Credit Utilization or Util as it is more commonly known is the short term factor and one that can impact your score substantially if you do not manage it.
Util is how much of your available credit is being used up by you right now. For example suppose you had two cards
Credit Card 1: Limit of 5000 and an outstanding balance of 1000. That means you are utilizing 1/5 or 20% of your credit limit on this card.
Credit Card 2: Limit of 3000 and an outstanding balance of 1000. That means you are utiliizing 1/3 or 33% of your credit limit on this card.
Add the two together and you will see that you have a credit limit of 8000 out of which you are utilizing 2000, which is 1/4 or 25%.
Now if you close out the first card with the balance still on it. Your credit limit is now just 3000 but the outstanding balance is 2000 which is 66%. A higher Util is not good for you as it pulls your credit score down.
So what you need to do is, to pay off your credit card completely before closing it. After that, make sure that your Util stays under 10% for a few months and you will be fine. That will mean that you spend less on your credit card than you are used to, but that is just something that you will have to live with.
Long term factor
Length of your credit history and Average account length will get impacted in the longer term. A credit card which was closed gets deleted from your credit history in ten years time. So that means after ten years, if this was your first credit card, your credit history might get shortened or in other cases the average age of your accounts may come down. This factor will reduce your credit score. However if you play your cards right, ten years is a long time to make the right moves and ensure that this drop in score doesnâ€™t happen at all.
If you took a secured credit card or a prepaid credit card to build your credit history and are paying a high annual fee on it, you should definitely close them if you have managed to get some other card which has no fee on it. Do not use too much of your credit limit and you will be fine.