Credit can be harmed by canceling a credit card in a number of ways, especially if you’ve had it open and in good standing for a long time. Although the effects may only last temporarily, it’s crucial to carefully weigh the benefits and drawbacks before choosing to close a card.
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You might be tempted to cancel a credit card for many reasons. Maybe youre tired of annual fees or you no longer use the card. Perhaps you want to streamline your finances or eliminate a temptation to overspend.
Sometimes it’s the right decision to cancel a credit card, but doing so is permanent and can negatively impact your credit in a number of ways. Thats especially true if its an older account in good standing. Here’s what you should know about how canceling a card could impact your credit before you do so.
In the realm of personal finance credit cards play a pivotal role in shaping our financial well-being. While they offer convenience and rewards, navigating their intricacies can be a daunting task. One such dilemma that often plagues cardholders is whether closing a credit card can negatively impact their credit score. This comprehensive guide delves into the intricacies of this topic providing you with the knowledge and insights you need to make informed decisions about your credit card management.
The Impact of Closing a Credit Card:
Despite what many people think, terminating a credit card can actually negatively impact your credit score. This impact stems from several key factors that contribute to your overall creditworthiness. Let’s delve into the specifics:
1. Credit Utilization Ratio:
Your credit utilization ratio, which measures the percentage of your available credit that you’re currently using, comprises a significant portion of your credit score. When you close a credit card, the available credit limit associated with that card is removed from your overall credit limit. Consequently, your credit utilization ratio increases, potentially harming your credit score.
2. Age of Credit:
Another significant element that affects your credit score is the length of your credit history. Your score may suffer if you close an older credit card because it will shorten the average age of your accounts. Although closed accounts continue to add to your credit history and stay on your credit report for ten years, their influence eventually fades.
3. Credit Mix:
A diverse credit mix, encompassing different types of credit accounts, is essential for a healthy credit score. Closing a credit card can reduce the variety of your credit accounts, potentially lowering your score.
4. Payment History:
Your payment history, reflecting your track record of timely payments, is the most significant factor in determining your credit score. While closing a credit card doesn’t directly affect your payment history, it can indirectly impact it if you struggle to manage your remaining credit card debt.
When to Keep Your Credit Card Open:
In certain situations, keeping your credit card open can be advantageous for your credit score. Consider these scenarios:
- The card is your oldest account: Maintaining your oldest credit card can significantly boost the average age of your accounts, positively impacting your credit score.
- You have limited credit history: If you have few open credit accounts, closing one can further limit your credit mix and result in a thin credit file, making it challenging to qualify for future credit.
- High balances on other cards: Closing a card with a low balance can significantly increase your credit utilization ratio on other cards, potentially harming your score.
When to Close Your Credit Card:
While keeping your credit card open can be beneficial in some cases, there are instances where closing it might be the wiser choice. Here are some scenarios to consider:
- High annual fees: If the card’s annual fee outweighs the benefits it offers, closing it can save you money in the long run.
- High interest rate: If you carry a balance on the card and the interest rate is exorbitant, closing it can help you avoid accumulating excessive interest charges.
- Difficulty managing debt: If you struggle to manage your debt and consistently miss payments, closing the card can prevent further financial strain.
- Temptation to overspend: If the card tempts you to overspend and incur debt, closing it can help you curb your spending and regain control of your finances.
- Upgrading to a better card: If you’re eligible for a card with more attractive rewards or benefits, closing your existing card and switching to the new one can enhance your financial situation.
How to Close a Credit Card Safely:
If you’ve decided to close your credit card, follow these steps to ensure a smooth and safe process:
- Pay off the remaining balance: Before closing the card, it’s crucial to pay off any outstanding balance. If you’re unable to do so, you’ll still be responsible for making monthly payments with interest until the balance is cleared.
- Redeem rewards: If your card offers rewards, redeem them before closing the account to avoid losing them.
- Update automatic payments: If your card was linked to any automatic payments, update your payment information to prevent service disruptions.
- Inform authorized users: Notify any authorized users on your account about the closure and ask them to destroy their cards.
- Request closure: Contact your card issuer’s customer support and request account closure. Obtain written confirmation of the closure and the reason for it.
- Follow up: After a few weeks, follow up with your issuer to ensure the closure has been processed.
- Securely destroy the card: Shred or cut up your card thoroughly to prevent potential fraud.
Alternatives to Closing a Credit Card:
If you’re considering closing your card to improve your credit score, there are alternative strategies you can explore:
- Negotiate annual fees: Contact your issuer and inquire about lowering or waiving the annual fee.
- Reduce temptation: Store your card securely and avoid saving its information online to minimize overspending.
- Set it and forget it: If you rarely use the card, consider making a small recurring charge to keep it active.
- Switch cards: Explore the option of switching to a different card with your issuer while maintaining your credit history.
Closing a credit card can have both positive and negative consequences for your credit score. Carefully weigh the pros and cons before making a decision. By understanding the factors that influence your credit score and implementing responsible credit management practices, you can make informed choices that align with your financial goals.
Additional Resources:
- Experian: Will Closing a Credit Card Hurt Your Credit?
- Investopedia: The Safe Way to Cancel a Credit Card
- Credit Karma: How Closing a Credit Card Affects Your Credit Score
Disclaimer:
This information is provided for educational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor before making any decisions related to your credit cards or finances.
Does Closing a Credit Card Hurt Your Credit?
Your credit score is based on several different factors. Closing a credit card can impact most of them negatively and potentially lower your credit score. In more detail, here are some of the ways it might affect your credit:
When you close a credit card, you lose the available credit limit on that account. This raises your credit utilization ratio overall, which is the proportion of your available credit that you use at any given time for revolving credit. Your credit score is largely influenced by your credit card utilization, with the amounts you owe on your accounts ranking as the second most significant factor.
Once your credit utilization reaches 30%, it starts to have a greater negative impact on your credit scores. Generally speaking, a lower utilization rate is preferable as it indicates a higher capacity to settle debt. Divide the total of all of your credit card balances by the total of all of your card limits to find your overall utilization ratio. Then, multiply the result by 100 to get a percentage. To get a better idea of how closing a credit card could affect your utilization rate, try this both with and without the credit card you are thinking about closing.
The age of your accounts is a factor in determining your credit score in 2015; longer payment histories support your credit score. Because it can reduce the average age of accounts, closing a credit card, especially an old one, may also have a subsequent impact on your score.
Since accounts that are closed in good standing remain on your credit report and are taken into account when calculating credit scores for ten years, you shouldn’t be too concerned about this right away. Closed accounts that have missed payments associated with them will remain on your credit report for seven years. However, it’s worthwhile to reevaluate whether you should close an account that has long improved your credit history.
The diversity of your accounts, or your credit mix, accounts for around 10% of your credit score. Having a variety of accounts, such as utilizing both revolving credit (credit card or line of credit) and installment debt (auto, student, or mortgage), improves your credit. If this is your only account with revolving credit, closing it can hurt your credit mix.
Your payment track record has the largest influence, counting toward 35% of your credit score. That implies that timely loan and credit card payment has a significant influence, either favorably or unfavorably. If you have trouble making your bill payments on time, the possibility of missing one could be sufficient to warrant canceling your account.
You might find it difficult to manage several credit card accounts, or your credit card may tempt you to overspend, resulting in bills you are unable to pay on time. The temporary hit to credit scores from late payments is so great that it may be worth closing an account where there is a chance of this happening. You won’t be allowed to take on more debt if you still owe money on the concerned card. However, you will still need to pay it off.
When Should I Keep My Credit Card Open?
There are some times when it may be wise to keep the account open, such as when:
- Its the oldest account on your credit report.
- You don’t have many or any other open credit accounts, which can thin your credit file and lower your credit mix, making it more difficult for you to get credit in the future.
- Closing the high balances on your other credit cards would have a significant negative effect on your credit utilization ratio.
What CLOSING a Credit Card Did to My Credit Score…
FAQ
Is it better to cancel unused credit cards or keep them?
How do I get rid of a credit card without hurting my credit?
How many points will my credit score drop if I close a credit card?
Is it bad to remove a credit card?
Does closing a credit card hurt your credit score?
Canceling a credit card can hurt your score. It’s smart to have an idea of what closing the card would do to your credit score before you do it. Canceling your cards with the highest credit limits could potentially do the most damage.
How does canceling a credit card affect your credit score?
Canceling your credit card can negatively impact your credit score in two main ways: One figure that accounts for 30% of your credit score is your credit utilization ratio. This is the amount of credit you use compared to your available credit.
Should you close a credit card if you lose credit?
The potential loss of credit score points doesn’t mean you should never close a credit card, but it does mean you should think strategically and choose carefully. See your free score anytime, get notified when it changes, and build it with personalized insights. Does closing a credit card hurt your credit?
What happens if a credit card falls off your credit report?
Eventually, the credit card will drop off your credit report, because it’s no longer active. If you’re closing your oldest account, your credit score might drop 10 years from now when that account falls off your credit report.