When It’s Better To Keep The Card
On the flip side, there are certain circumstances when it can be wiser to keep the account open, such as when:
- It’s the oldest account on your credit report
- You don’t have many other open credit accounts, which can result in a thin credit file, making it harder to qualify for future credit
- The only reason you’re canceling it is that you don’t use it very often
How To Cancel A Credit Card: 6 Steps
Let’s say you do decide that closing the account is the best move. Here are six simple tips to help you navigate the process:
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.
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When Closing A Credit Card Does Affect Your Credit Score
Thats not to say you should begin closing credit cards with abandon. It is possible to harm your credit by closing an account, but it has nothing to do with your credit history.
Lenders want to make sure you arent too reliant on credit to cover your expenses. They like to see that youre carrying a small balance relative to the total amount of credit available to you. This is often referred to as your credit utilization ratio, which you can calculate by dividing your total balance owed by the total amount of credit you have available.
For example, say you have three credit cards:
If you add up all your balances and then divide by your total credit limit , youll get a credit utilization ratio of about 21 percent.
How much you owe is one of the biggest factors that affect your credit; it accounts for 30 percent of your score. If your utilization ratio gets too high, your score can drop. Though there is no magic number, most experts recommend maintaining a credit utilization ratio of less than 30 percent to avoid any negative impact on your credit. All types of credit are considered, but revolving credit is weighted much more heavily.
So how does this relate to closing an account? The reason that closing a credit card account affects scores is because when you close it, you lose the available credit on that account, said Griffin. As a result, your utilization rate increases.
Does Closing A Credit Card Affect My Credit Score
First off, itâs important to understand that you donât have just one, universal score. Each lender will give you a score when you apply for credit, and they all have their own way of calculating it. Typically, theyâll take into account information on your application form and â as well as any data they hold on you if youâve been their customer before. So, cancelling a credit card may impact your score, but it really depends on the lender.
One reason your score may be negatively affected is that your overall credit utilisation may increase. Credit utilisation is the percentage you use of your . For example, if you have an overall credit limit of Â£2,000, and you use Â£1,000 of it, your credit utilisation is 50%. But if you cancel a card and your limit is reduced to Â£1,500, youâll be using 75% of it.
When deciding whether to approve you for credit, lenders take into account the limits available to you â not just what you owe â to judge whether you can cope with new credit. As a general rule, they like to see you keeping your credit utilisation below 25%.
However, keeping long-held, well-managed credit accounts can improve your score with some lenders. This shows youâve been a reliable borrower in the past, which may suggest youâre likely to repay other lenders too.
You can get a good idea of how lenders may see you by checking your free Experian Credit Score.
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Remember To Redeem Any Rewards
Rewards on cards that offer perks like travel credit or cash back dont have to be forfeited entirely when you close your card. Look at the requirements on your rewards to see if there are any thresholds you are close to reaching. You may only be a few miles from a plane ticket or a couple of dollars from the cashout minimum. Talk to your credit card company as some offer a statement credit in exchange for your accumulated miles.
Consider The Timing And Impact On Your Credit
When you close a credit card, your credit score may be affected. Its helpful to understand that a part of how your credit score is calculated is the length of your accounts and your credit utilization. Your score goes up the more unused credit you have available compared to the debt you have used. When you cancel a card, your available credit goes down, worsening your credit utilization ratio. While this may help you avoid the temptation to overspend or help simplify your bills, you should still keep in mind that this may make it more difficult for you to find financing on large purchases like a car or home. Talk to a financial advisor if you are uncertain about whether you should cancel your card.
How To Cancel A Credit Card
If youve decided that canceling a credit card is your best option, you need to be thorough and deliberate. After paying your balance in full, get specific account closing instructions from the cards customer service department. The operators will likely try to persuade you to keep your account open. Be polite, but firm. And, confirm with the operator that your account will indeed be closed. Then verify the account was actually closed through email and another call.
The bottom line is that closing a credit card account could hurt your credit score. The key is balancing responsible credit management and the desire to maintain or improve your credit score. Understanding your specific credit situation, including your spending habits, utilization ratio and low risk cancellations can help you make the right decision.
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Whats The Best Way To Close A Credit Card
When you cancel a credit card, go into it with a smart strategy to minimize any damage to your credit score. If youre closing more than one credit card account, try to space them out over time.
That way, your credit utilization ratio wont drop overnight. The same advice applies when opening a new credit card account since each new account causes a small score drop for 12 months.
Its also important to avoid canceling a credit card account right before you apply for a mortgage or other loan. Even if your lower credit utilization only makes your score drop by a few points, that can really make a huge difference in which interest rates youre offered by your lender.
The cutoff point for the very best rates is typically 740. If your credit score is right on the line, even a minor change can cause you to lose the very best loan terms.
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Check Your Credit Report Again
Once the card is closed, its always a good idea to check your credit report again. By law you are entitled to a full credit report from the three major credit bureaus Experian, Equifax and TransUnion once a year for free. To get your full reports, head on over to the annual credit report site and click the Request your free credit reports button. If youve already received your free yearly report, be prepared to pay up to $12.50 per report if you decide to check your credit report after closing down a credit card account.
Does Cancelling A Credit Card Hurt Your Credit Score
Whether you have too many and want to cut back, or youre trying to limit your chances of overspending, weve probably all found ourselves in the situation of trying to decide whether or not we should cancel a . Before jumping the gun, you should first consider how doing so could affect your ; because it can, and not in a positive way.
- As a general rule of thumb, its better not to cancel a credit card if you dont need to particularly if its your first credit card or has a high credit limit
- Cancelling a credit card can affect your total credit limit and history, and potentially ding your credit score. It shouldnt be a spur of the moment decision
- If youre just looking to avoid an annual fee on an unused card, consider asking your bank if you can switch it to a no fee alternative instead of cancelling
- Sometimes cancelling a credit card makes sense or is necessary. By following the right steps, you can close an account without harming your credit score long-term
- Late payments or maxing out your credit card are generally far worse for your credit score when compared to just closing a credit card
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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:
Tom Jackson focuses on writing about debt solutions for consumers struggling to make ends meet. His background includes time as a columnist for newspapers in Washington D.C., Tampa and Sacramento, Calif., where he reported and commented on everything from city and state budgets to the marketing of local businesses and how the business of professional sports impacts a city. Along the way, he has racked up state and national awards for writing, editing and design. Toms blogging on the 2016 election won a pair of top honors from the Florida Press Club. A University of Florida alumnus, St. Louis Cardinals fan and eager-if-haphazard golfer, Tom splits time between Tampa and Cashiers, N.C., with his wife of 40 years, college-age son, and Spencer, a yappy Shetland sheepdog.
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Ways To Safely Close Your Credit Card
Closing a credit card may seem simple enough. But before you break out the scissors to snip your card in two, here are some things to consider:
- Pay down your balance first: While you can close a credit card with an active balance, you may want to consider paying down your balance first. Even if you close your account, youâre still responsible for any remaining balance or interest and fees that might be charged. Plus, paying down your balance first will help keep your credit utilization under control. And that can help minimize impacts to your credit score.
- Double-check your payoff amount: In some cases, the payoff amount for your card may be more than just the statement balance because of fees and interest. Be sure you check with your card issuer to confirm what you owe.
- Get confirmation of your cancellation: With some issuers, you can simply sign in to your account in order to close it. Or you may be able to call your card issuer to make the request. Either way, consider getting a confirmation in writing. That way, you have a permanent record of it in case anything gets called into question.
- Check your credit report: After closing your card, you might also want to check your credit report. You can get free copies of your credit reports from all three major credit bureausâvisit AnnualCreditReport.com to learn how.;
If you still have questions about closing your account, you can also check your cardholder agreement for more details.
Not Necessarily A Clear
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 consequences of keeping a card that you may not really need. If it has expensive annual fees and a lack of rewards to make up for it, that may outweigh the impact of closing it. To learn more about the ins and outs of managing your credit, visit Navy Federals MakingCents.
This article is intended to provide general information and shouldn’t be considered legal, tax or financial advice. It’s always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.
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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.
Your Spending Is Out Of Control
If you cant control your spending, it may be best to get rid of the temptation of putting expenses on a credit card.
If theres a concern that having that available credit is going to possibly entice to do something they dont want to do, then that would be an opportunity to close out the card, says Larry Sprung, a Certified Financial Planner whos the founder and president of Mitlin Financial in Hauppauge, New York.
Even if theres a temporary hit to your credit score, canceling a credit card can give you time to learn about money and curb any temptation to spend. Once you can manage your finances responsibly, you can always get a credit card again.
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It May Increase Your Credit Mix
Even if you don’t yet have a credit card, you may have other forms of credit, such as a personal loan or auto loan. These are installment loans: You borrow a set amount, pay it off in monthly installments, and once paid, the account is closed.
Credit cards, on the other hand, are considered revolving credit. Revolving credit allows you to borrow over and over up to a set limit as long as you make at least a minimum payment every month. Any unpaid balance rolls over, or revolves, monthly. Interest will be charged on whatever balance remains unpaid.
If you only hold installment credit, getting a credit card will increase the types of credit you maintain, known as your . Having both installment and revolving credit shows lenders you can manage different types of credit accounts . This can help your credit score, as credit mix accounts for 10% of your FICO® Score, the scoring model most commonly used by lenders.