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.
Dont Cancel Unless You Have To
Since credit utilization is such a big factor in how the credit bureaus calculate credit scores, its to your benefit to do what you can not to cancel your credit card.
If you just dont use the card anymore, consider simply leaving it out of your wallet and storing it somewhere safe. Some people recommend putting a recurring charge like a subscription on the card to keep it active and prevent the credit card companies from cancelling cards automatically. Thats not really necessary, in my experience, but it doesnt hurt. Just make sure you pay the bill on time.
If you cant justify paying the annual fee for a credit card, you still have options. Credit card companies often offer retention bonuses to customers that call in looking to cancel. They might waive the annual fee or offer bonus points just for asking. If youve been a good customer for a long time, its more likely youll get offered some incentive to keep the card.
Even if youre not going to use the credit card, it never hurts to have an extra line of credit at your disposal if you ever need it.
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How Canceling A Credit Card Impacts Your Fico Score
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Here at TPG we spend an incredible amount of time talking about which credit cards you should open, which cards pair well together and even how to build an overarching credit card strategy. An equally important topic that rarely gets as much attention is when and why you should consider closing your credit cards.
If you have credit cards you no longer find valuable, especially if it charges an annual fee, your first instinct may be to cancel that card. Your strategy for closing cards deserves as much attention as your strategy for opening them because closing accounts can potentially affect your credit score.
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Closing A Card May Still Be Right For You
The above factors may not necessarily have a significant impact on your credit score. And, depending on your situation, the benefits may still outweigh the drawbacks. Closing an extra card may still make sense for you if:
- you have zero debt on your accounts. If you never leave any unpaid amounts on your credit cards to begin with, your credit score wont face a utilization penalty because of a closed account. Just keep in mind that your credit card issuer needs time to report your balance as paid off to the Credit Bureau.
- the card account isnt your oldest. The age of your oldest account has a significant impact on the evaluation of your credit history. If the account you want to close is a newer one, closing it will have a much smaller impact on your credit score when its history is eventually removed.
- you have too many credit cards. If you feel all your cards are starting to become unmanageable or if you have difficulty paying them off each month, then it may be a good idea to consider closing an account. If you have cards that you dont use or check often, they could be at risk for fraud. Decide if keeping them open is worth it.
Does Closing A Credit Card Hurt Your Credit Score
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Closing a credit card can subtract points from your credit score. The impact is likely to be greatest if you are relatively new to credit and/or have few cards.
A lower credit score might make it harder to qualify for an apartment, a loan or another credit card, particularly if your credit score is near a lenders cutoff.
The potential loss of credit score points doesnt mean you should never close a credit card, but it does mean you should think strategically and choose carefully.
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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.
Alternatives To Closing A Credit Card
if you do not want to cancel or close your credit card and are looking for alternative ways you can remedy the issues that were leading you to want to cancel the card, here are some tips:
if you were cancelling your credit card because of annual fees, you can call your issuer to consider lowering or waiving the annual fee. some companies may be willing to do this to retain their customers.
if you are worried about overspending if you keep the card, put it somewhere secure or you can even pause your credit card account for a few months.
if you rarely use the credit card you wanted to close, you can keep it open by putting a small monthly subscription to your favourite magazine or OTT. however, make sure you don’t forget the payment due date of your credit card and make payments on time.
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When Closing A Credit Card Makes Sense
So is it bad to close a credit card? Not necessarily. While it could put a dent in your score, there are a few instances when it might make sense to do so:
- High APR.If you’re running a high balance and are only making the minimum payments on your card, and the amount of interest you’re paying on a card is getting substantial, it might make sense to close that card.
- High fees. It might make sense to cancel a credit card if there are high fees, such as late payment fees, annual fees, cash advance fees or fees when you go over your credit limit.
- Frequent overspending.If your balance keeps increasing and incurring interest, canceling your card might be the smartest move to avoid digging yourself into debt.
- Divorce or separation.If you had a joint credit card with a spouse or significant other and are going through a breakup, then closing your credit card could help keep your finances straight and avoid your soon-to-be ex putting unwanted purchases on a joint card.
- Outstanding debt. If you have outstanding debt that you’re having a hard time paying down, or are getting on a debt management plan that requires you to cancel your credit card accounts, this may be unavoidable. While your credit will likely take a hit, closing these accounts so you can focus on other debt payments could set you up for long-term success.
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.
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How Closing A Credit Card Will Affect Your Credit Score
Closing a credit card can affect your credit score for a few different reasons.
For starters, when you close a credit card account, you lose the available credit limit on that account. This makes your , or the percentage of your available credit you’re using, jump upand that’s a sign of risk to lenders because it shows you’re using a higher amount of your available credit. Experts recommend that you keep your utilization rate under 30%, and in general, the lower the rate, the better. To calculate your credit utilization ratio, divide the total of all your credit card balances by the total of all your credit limits your resulting percentage is your utilization ratio.
Closing a credit card can also affect your score because it can lower the average age of accounts on your credit report, especially if it’s an account that’s been open for a long time. The age of your accounts is factored into your credit score, with longer payment histories bolstering your credit score. This shouldn’t cause immediate concern, however, since accounts closed in good standing stay on your credit report for 10 years and are factored into credit scores the entire time they remain. Closed accounts that have missed payments associated with them will remain on your credit report for seven years.
When Is It Best To Cancel An Unused Credit Card
As a rough guide, it is better to cancel an unused credit card if:
- The card has a high annual fee
- The card has a high interest rate
- You have had problems with debt in the past
- You have multiple unused cards and/or you are considering applying for a mortgage
If you are considering cancelling unused credit cards, always cancel the newest cards first. Older cards have a greater impact on your credit score, so cancelling a newer card is often better.
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Closing A Credit Card Wont Impact Your Credit History
You may have heard that closing a credit card causes you to lose credit for the age of the account. That is mostly a myth.
Credit expert John Ulzheimer, formerly of FICO and Equifax, confirms that closing a credit card will not immediately remove it from your credit reports. As long as the credit card remains on your report, you will still get the value of the age of the account in both the FICO and VantageScore branding credit scoring models. The only way to lose the value of the age of the card is if its removed from your reports, Ulzheimer says.
A closed account will remain on your reports for up to seven years or around 10 years . As long as the account is on your reports, it will be factored into the average age of your credit.
Dos And Donts Of Closing A Credit Card
There are good reasons for closing a credit card. Whether the temptation of using credit is leading you to constantly overspend and rack up interest, you have so many cards that youâre losing track and missing payments, or you want to get rid of a card with a low limit and higher than normal interest rates, cancelling can be the right move.
If you plan on cancelling one of your credit cards, consider the following doâs and donâts to minimize the impact on your credit score.
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When To Close A Credit Card
To reiterate: All things being equal, its best to keep accounts open. This is not to say there arent situations where selectively shutting them down makes sense.
Those situations include:
- Youre getting divorced and you share accounts with your future ex-spouse.
If your trigger is/are high annual fees and/or high interest rates, check with the issuer about keeping your account open with a low- or no-fee option most awards cards have them and/or reducing your interest rate. Explain that if you cant come to an accommodation, youll have to close the account. Most companies want to keep your business.
Why Canceling A Credit Card Could Hurt Your Credit Score Temporarily:
One way canceling a credit card account could hurt your credit score is if it reduces the amount of credit that you have available and thus increases your overall . Keeping utilization low is key for a good credit score. So closing a high-limit credit card account will hurt your score more than closing a low-limit account, all else being equal.
Another way canceling a credit card account could hurt your credit score is if it brings down the average age of your accounts. That can make it seem like your credit history is shorter than it really is. Closing one of your oldest accounts will lead to more credit score damage than closing a newer one.
Plus, youll have one fewer account reporting positive information to the credit bureaus each month, assuming the credit card you cancel was in good standing.
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How Canceling Your Credit Card Could Damage Your Credit
Will canceling credit cards damage your credit?
If you are not using a credit card, should you cancel it? You may have heard conflicting information on this topic.Like many issues surrounding credit, it depends on the situation. However, properly closing a credit card does not automatically damage your credit.
High interest rates, yearly fees, and too much temptation to use a paid off card are good reasons to close a credit card account. However, be sure you understand how closing the account may affect your credit.
Benefits of keeping an unused credit card account open
Even though you are not using a credit card, there are benefits to keeping some accounts open, including:
- Increased available credit: If you close an account, you lose the available credit on your record. If you have debt on other accounts, losing the available credit can reduce your debt-to-available-credit ratio, which can affect your .
- Enhanced credit history: An open account in good standing will remain on your credit report indefinitely. You will also increase the length of your credit history on the account. Credit history accounts for 15% of your credit score.
Properly close your accounts for the least affect on your credit score
If you decide to cancel a credit card, you can minimize the effect it will have on your credit.
Closing an account is more than just cutting up your card. When canceling a credit card, you should:
Weigh your options before making a decision
Reasons For A Credit Card Account Cancellation
Just as you can cancel your credit card any time you no longer want or need it, your credit card issuer also has the right to cancel your credit card at any time. You may not even get a warning when your credit card is canceled and inconveniently learn your card has been canceled after having a transaction declined. Here are a few reasons a credit card issuer may cancel a credit card.
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It Changes The Length Of Your Credit History
Your length of credit history makes up 15% of your credit score, and it includes the age of your oldest card, your newest card and the average age of all your cards. A longer credit history can boost your score.
Closing your oldest card could shorten your average and bump down your score. But the impact won’t happen right away. Typically, a closed credit card in good standing will stay on your credit file for 10 years, so it could be a while until closing an older card account dings your score.
How To Close A Credit Card Without Damaging Your Credit Score
if you have made up your mind that you want to close your credit card account, here are a few suggestions that you should keep in mind so you have no issues in future:
- pay off all outstanding balances before closing your credit card.
- redeem all outstanding rewards if you have a rewards credit card.
- if you have any auto-payments set on this credit card, stop it or move it to other available options to avoid missing payments.
- give a heads-up to the customer support of your credit card issuer that you want to close your account and ask them to confirm in writing that the account was closed at your request.
- send a follow-up notice to your credit card issuer to confirm your cancellation in writing. you should also mention your name, phone number, address, credit card account number and other details in the letter.
- once your credit card is closed, destroy it and put the pieces of it in different trash bags to make it harder for a potential thief to find and piece together your credit card details.
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