Should I Cancel My Credit Card
Canceling a credit card is generally a bad idea, especially if its an old account. Its usually better to keep the account open even if you dont use it anymore. This is because a big part of your credit score is determined by the age of all your revolving credit accounts.
Keep reading to learn how closing a credit card can hurt your credit score.
Lowering Your Length Of Credit History
The longer youve been using credit, the better it is for your credit score. Thats why, as myFICO.com says, newer credit users will have a more difficult time earning a high credit score than will those with a longer credit history.
Closing your oldest card will shorten your length of credit history which accounts for 15 percent of your credit score.
The damage from this, though, wont happen for a long time. Thats because closed credit card accounts will stay on your credit reportfor up to 10 years from the date of your last activity.
Just the fact that you closed your card doesnt mean it wont play a role in determining your credit score, said Freddie Huynh, vice president of credit risk analytics at San Mateo, California-based Freedom Financial Network. The payments you made on those accounts dont just disappear when you close them.
Should I Cancel My Credit Card If I Dont Use It
Now that you know credit card companies can close your account for not using it, should you proactively close your credit card?
In most cases, you should try to keep your credit card open to avoid a negative impact on your credit score. You can do this by setting up an automatic subscription on your card, such as your monthly Netflix membership fee. Then, put reminders on your calendar to avoid missed payments or schedule automatic payments to avoid paying interest and fees while keeping the card active at the same time.
If your credit card has an annual fee and you dont use the card or any benefits it offers, it usually makes more sense to close the card rather than pay the annual fee. You may see a dip in your credit score, but it doesnt make sense to continue paying an annual fee year after year only for your credit score.
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Alternatives To Closing Your Card
Closing your credit card isnt the only measure you can take, especially considering the potential damage to your credit score.
Keep in mind the two credit cards you may want to keep around: your oldest and the one with the highest credit limit. These will limit the damage to the length of your credit history and your credit utilization ratio.
If youre keeping a credit card you dont use much but are looking for some ways to make it more beneficial, consider switching to another credit card from the same credit card issuer. Take a look through their current offerings to see whether theres a comparable credit card that would be a better fit for you. Some issuers allow you to switch credit card accounts, or change products, without a detriment to your credit history, but you likely will not be able to take advantage of new-customer sign-up bonuses if you change credit card products with the same issuer.
If the credit card you want to cancel has a high interest rate, consider transferring the balance to another, lower-interest, card. Youll be able to keep your card and pay off the balance at a lower rate. Keep the old credit card active by making a small purchase each month and then paying it off in full.
Finally, if youre having trouble resisting the temptation to spend, you can put your credit card awayor cut it upat least until youre finished paying off your debt.
Will My Credit Score Go Down If My Account Is Closed For Non
Theres a good chance your credit score will go down if your account is closed due to inactivity, especially if the card closed is one of your older credit cards or you carry balances on your credit cards.
A closed credit account can impact three of the five categories that determine your credit score including amounts owed, length of credit history, and credit mix.
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What Companies Close Accounts For Non
All credit card companies have the right to close your account due to inactivity and dont have to give you notice that theyre doing it. Credit card issuers may take many factors into account when deciding whether to keep your account open even if it is inactive.
For instance, a customer that holds many active accounts with large balances at an institution may be able to keep an inactive credit card open longer than a customer that only has a credit card account that hasnt been used for years.
That said, its better not to risk closure because of inactivity. You can do this by making a small charge on your account every few months and paying it off in full when the statement arrives.
If youre looking for a credit card that youll want to use, check out rewards credit cards like the Chase Freedom Flex.
Keep The Card For Small Regular Payments
If you dont want to swap, upgrade or downgrade your credit card but arent currently using it, you can keep the account active without much effort. If you choose to keep the credit card open, put one small recurring charge on it every month and set up automatic payments so that your statement balance always gets paid on time. This way, your credit card remains active without much effort on your part.
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Other Factors To Think About
Choosing to close a credit card or keep it open isnt always a simple decision. You have to consider how it may hurt your credit score, but you should also weigh the impact of keeping a card that you dont really need. If a rewards card has a high annual fee, but you dont use it enough to get much out of it, that may outweigh the impact of closing it. One place to start is at Annual Credit Report, where you can get a free credit score and a look at your complete credit profile. To learn more about the ins and outs of managing your credit, visit Navy Federals Mission: Credit Confidence.
How Much Does Closing A Credit Card Hurt Your Credit
People should think very carefully about canceling a credit card on which they have developed a positive payment history, says Freddie Huynh, who logged 18 years as FICOs lead data scientist before joining San Mateo, Calif.-based Freedom Financial Network as its vice president for credit-risk analytics.
The longer you hold such an account, Huynh says, the more valuable it is in your credit score determination. This is because more credit history provides prospective lenders with more information on a borrowers financial behavior over time.
If you close any card older than your average account age, youll reduce your average and your score will take a whack. For instance, a consumer has five credit cards, 15, 12, 7, 3, and 2 years old, resulting in an average account age of 7.8 years. Close both the older cards and the consumers average account ages slips dramatically, to 4 years. Thats not much credit history Huynh says and FICO will respond negatively.
Shut down a card with lots of available spending room credit limit $5,000 or higher, for example and youll squeeze your credit utilization ratio.
And you guessed it thats another whack at your credit score.
But, worried about the temptation to spend more, he closes the $10,000 card. That means hes spending $7,000 on cards with a total credit limit of $13,000 and his credit utilization soars to 54% .
Hes well over the recommended credit utilization of 30% and his FICO score will take a hit.
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The Average Age Of Your Accounts Will Decrease
The longer you’ve had credit, the better it is for your credit score. Your score is based on the average age of all your accounts, so closing the one that’s been open the longest could lower your score the most. Closing a new account will have less of an impact. To keep your credit score in good standing, it’s important to remember to stick with a low balance that can easily be paid off before your due date.
When Canceling A Credit Card Makes Sense
There are a few situations in which it may make sense to cancel a credit card. For example, if:
- The card has a high annual fee and the benefits aren’t worth it to you
- The interest rate on the card is high and you need to carry a balance
- You are struggling to manage your debt load and are having trouble resisting the temptation of living beyond your means with the card
- You want to get rid of a bare-bones card, like a student card or secured card, in exchange for a regular or rewards card
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Why Canceling A Credit Card Might Still Make Sense:
Despite the potential for short-term credit score damage, canceling a credit card can still be the right decision. For example, if youre paying an annual fee for a card you dont use, and youre not planning to apply for a mortgage or car loan in next few months, its probably better to close the account. Credit scores usually rebound within 3-6 months after canceling a credit card. And if you dont plan to borrow during that time, you dont have to worry about that drop.
But an unused is another story. Even a credit card with zero balance still reports positive info to the credit bureaus on a monthly basis. That means its an asset to your credit score.
In any case, you should know all the facts before you cancel a credit card, so you can make an informed decision. Well summarize the key considerations below.
Check How Your Credit Score May Be Affected
If you want to gauge how closing a credit card may affect your , consider online score simulators, such as from Capital One. For instance, CreditWise’s simulator allows you to see how taking certain actions, such as closing a credit card or paying off a balance, might impact your credit score.
When I simulated how closing my oldest credit card would affect my credit score, it only showed a one point decrease from 808 to 807. Keep in mind, the exact effect on your credit score can vary.
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Why Is My Utilization Ratio Important
You might want to consider that closing a credit card account has the potential to negatively affect your utilization ratio. Its usually a factor that determines your credit score. And its based on the amount of credit youve used versus the amount you have available. Having more credit available and less credit used is ideal and usually beneficial to your credit score. When you close credit cards, you will end up with less credit available.
Terminates Access To Benefits
If youre a frequent traveler or shopper, the miles and cash back options offered by some cards may be very attractive. While these benefits are usually not a good reason alone to keep a card around, you may want to factor in the value you place on those rewards when considering closing a card.
While it may sometimes be appealing to cut up your cards and cancel your accounts, you should weigh how this may impact your credit score before doing so. If you have a card youre not using, maintain other types of credit, have a low utilization ratio, and are not planning on applying for any loans soon, it may be a good idea to cancel your card. Understanding the factors that affect your credit score may help you make smarter financial decisions and gain greater control of your finances.
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So Can I Close My Credit Card
Well, the impact of a closed credit card account will lessen significantly if youve got plenty of available credit and small or zero balances on your other credit cards .
However, if youre other accounts are maxed out, closing an open account with plenty of available credit will do more damage, as youll seem overextended .
And as mentioned earlier, you shouldnt tinker with your existing accounts before and during applications for major loans doing so could put your approvals in jeopardy, so its best to wait until your new loans are finalized.
Tip: If you do close a credit card account, try to avoid closing your oldest healthy tradeline, as an old credit line tends to carry more weight than a new one.
When It Makes Sense To Cancel A Credit Card
While canceling your credit card may impact your credit score, there are some reasons to move forward with this decision. Here are a few examples:
- You have a high interest rate.
- You find it challenging to resist the temptation of using this card.
- You want to trade a secure card for a credit card with better benefits and rewards
- Your credit card benefits arent worth the high annual fee.
If any of these reasons apply to you, it may be worth it to cancel your card. Additionally, if you find the long-term benefits outweigh the short-term impact, its wise to move forward with canceling the card.
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Follow Up With A Certified Letter
After you cancel your credit card by speaking with a customer service representative, follow up your request with a certified letter to your credit card company. Restate your decision to cancel your credit account and request that they send you a letter confirming that your credit card has been canceled and that the account balance was $0 at the time of cancellation.
Can Canceling Your Card Hurt Your Credit Score
It is possible that canceling your credit card may lower your credit score. Because credit is essential for establishing financial responsibility to lenders, renters, and creditors, maintaining a good credit score is essential. A good credit score is generally considered to be anything above 700. If you have a good credit score, you may not need to worry as much about closing a card. However, many factors affect a credit card score and everyones financial situation is different, so consider the length of your account history, your credit utilization ratio, and any upcoming purchases that will require a good score before canceling a card. Heres a more in-depth list of things to consider before canceling your credit card.
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Will Closing Credit Cards I Already Have Increase My Credit Score
Closing a credit card you already have may be an appropriate financial step based on your own personal circumstances, but dont assume it will improve your credit score.
It is quite possible that closing an existing credit card could actually hurt your score, rather than help it.
Part of your score is based on the amount of credit you have and the amount youve used this is known as the credit utilization ratio. So closing an existing card can increase your credit utilization ratio and lower your score.
Tip: Keep an eye on your statements. If you decide to keep an unused account open, be sure to watch your statements to protect against identity theft and to check for unexpected fees.
What Is Credit Utilization
You can calculate your credit utilization ratio using the following formula:
Maintaining a credit utilization ratio of 0% to 10% is best if you want to maximize your credit scores. But unless youre planning to apply for financing in the near future, a utilization rate of less than 30% may be sufficient.
Either way, youll want to pay your full statement balance by the due date every month to avoid expensive and to protect your credit score from late payments. If youre trying to keep the credit utilization on your credit report as low as possible, then the best time to pay your credit card is prior to the statement closing date.
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Ask For A Product Change
If you are unhappy with your credit card, call your credit issuer and request to swap your credit card for another card offered by the same issuer. If you have a credit card with an annual fee, for example, ask if you can downgrade your card to a no-annual-fee version. You might even be able to swap a cash back credit card for a travel rewards card .
How Your Credit Score Is Determined
Your credit score is a number that represents your creditworthiness and is typically impacted by:
- your payment history
- your credit utilization ratethe total of all outstanding balances you currently owe compared to your total credit limits
- the length of your credit history and the average age of your accounts
- whether youve applied for multiple new credit accounts recently
- your mix of credit
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Closing Your Oldest Credit Card Can Reduce The Length Of Your Credit History
The length of your credit history accounts for 15 percent of your FICO credit score. Its worth noting that you probably wont see the effect on your credit score right away, since closed credit accounts still contribute to your FICO credit score until they fall off your credit reportwhich could be as long as 10 years from now.
How much does closing a credit card hurt your credit? Its hard to say for sure. If you continue to use your other credit accounts responsibly by making on-time payments every month, maintaining a low credit utilization ratio and paying off your balances regularly, your credit score probably wont take much of a hit. A person with a positive credit history is likely still going to have a positive credit history even if they close one of their older credit cards.