Cancelling Unused Credit Cards
While we admire your instinct to do away with accounts you are not using, by now you have figured out that much in the world of consumer finance seems convoluted. Simply put, the Big Three credit bureaus like it when they see more and older accounts and more available credit.
If you have other credit cards with high balances, notes Anchorage, Alaska-based financial planner Chad Rixse, closing unused cards increases your utilization rate, which can also reduce your score.
However, if you keep accounts open, even with no balance, they stay on your credit report, increase your total amount of credit available, decrease your utilization rate, and remain as a positive mark on your report.
Moreover, if the unused card you intend to close is fairly new, has a low credit limit, or you dont have much debt, theres likely to be a minimal impact on your credit score.
What Happens To Your Average Age Of Accounts When You Close Cards
A common point of confusion is what happens to your average age of accounts when you close a card. The reality is that this metric could be impacted long term, but when you close a credit card it continues to show on your credit report until it falls off after up to 10 years.
Lets use the following example:
- A person has two credit cards
- One credit card has been open for two years, and another credit card has been open for four years, meaning that persons current average account age is three years
If you were to cancel the card youve had for two years, what would your average age of accounts be in two years?
- One card would be six years old
- One card would be four years old
That means your average age is now five years, which is better than before. At some point it will fall off your account and no longer contribute to your average age of accounts, but thats not immediate.
Consequences Of Failing To Pay By The Payment Due Date
Failing to pay your closing dates statement balance by the due date:
- Can lead to late fees and a hike in your interest rate if you dont make the minimum monthly payment.
- May damage your credit score if you continue to not pay for 60 days or more.
- Will lead to interest charges on any balance left over after the payment due date .
- Add charges to your next statement balance.
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Reasons You Should Close A Credit Card
Despite the potential downsides of closing a credit card, there are some very good reasons to close a credit card. Here are five reasons you might want to close a credit card:
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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.
Ways Cancelling A Credit Card Could Improve Your Credit Score
In general, your credit score is improved when you reduce some of the potential risks for lenders. So, if cancelling a credit card leads to any of the following changes, it could have a positive impact on your score:
- If it gets rid of a high credit limit. Having access to a lot of credit can hurt your credit score because it increases the risk that any new lenders would face if you applied for another card or loan. By cancelling your credit card, you’ll reduce this risk, which could also improve your credit score.
- If it shows you’ve settled outstanding payments. Before you can close a credit card account, you’ll need to make sure the balance is cleared. So, if you have previously had late payments or defaults recorded on this account, closing it could show you’re taking control of your debts.
- If it helps you make other payments on time. Once you’ve closed your credit card account, you’ll have one less bill to think about each month. If this makes it easier to deal with other accounts, it could improve your payment history and your 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.
Increases Your Credit Utilization
Your credit utilization ratio is determined by the amount of available credit you are currently using across all lines of credit. If your account has low to no balance and you cancel your card, the credit available to you will decrease. If you have a lot of debt on other cards, this can have a larger negative impact.
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What You Should Do First
The first thing is obviously to make a plan to pay the debt off.
That doesnt mean youll be able to pay it off in a few months — that will depend on your total card balance and the aggressiveness of your plan.
What it does mean:
Youll get on the path to making it happen.
After that is where things can get tricky — how can you make sure the debt never happens again?
Do you have to cut the card up? Do you have to cancel it altogether?
The worst thing you can do is make this decision in a fit of panic, as both options can have just as long-term of an impact as the balance youve accrued.
Instead, evaluate the options to discover what will work best for you.
When Should You Cancel Your Credit Card
you can consider cancelling a credit card under a few situations, such as:
- if your credit card has a high annual fee and offers fewer benefits
- if your credit card interest rate is high and you want to carry a balance
- if you are unable to manage your debts and having credit cards increase the temptation of living beyond your means
- if you want to close your student card or secured card, to get a regular or rewards card
on the other hand, you should keep your credit card open under the following circumstances:
- it is one of the oldest accounts on your credit report
- if you have fewer credit accounts, closing a credit card will further reduce the credit history, making it harder for you to get credits in future
- if you are cancelling your credit card because you don’t use it very often
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How Do You Cancel An Unused Credit Card
The most important things to remember is to tell the card company, by calling them or putting it in writing, and make sure youâve paid off your most recent statement or transferred it to another card first. You canât cancel a card simply by cutting it up into several pieces, cancelling direct debits, or just not using it any more â this could lead to missed payments, which can put you at risk of getting a default or even a CCJ .
Quite often, if you donât use your card for a long time, your provider might send you a letter saying theyâll close it unless you say otherwise.
Once youâve confirmed you want to cancel your card, the provider may try to keep you as a customer by offering incentives to stay, such as benefits or a different card. Some people may even phone up to deliberately try and get a better deal! By all means consider the incentives â but if youâre certain you want to cancel your card, go ahead and do it.
How Cutting Or Closing A Card Affects Your Credit Score
If youre dealing with debt, your credit score might not seem that important right now.
However, your credit score greatly impacts your access to future debt youll actually want to take on, such as for a car or home. It will also impact how much youll pay for such loans.
Therefore, even though paying off debt could feel like an emergency right now, dont let that lead you to decisions that could hurt your credit score.
Heres how both actions affect your score:
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What Is The Best Way To Cancel An Unused Credit Card
Cancelling and closing down a credit card account is relatively straight forward, however, you should think carefully before you contact your card supplier.
Before cancelling your unused credit card you should:
To cancel your unused credit card safely you should:
The Card Has A High Annual Fee
If your card has an expensive annual fee and you don’t use the rewards, it may be worth closing the card. Before you do, remember that you may lose the rewards you currently are eligible for. As an alternative, find out if the card issuer can transfer your account to a different card that doesn’t carry a fee. This lets you keep the account open while avoiding the annual fee.
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What Are Your Next Financial Goals
After you have a clear understanding of what got you to this point, the next thing to evaluate is your next financial goals. Those will play into how you should handle your credit card, besides paying it off.
If debt payoff is the only thing on your mind right now, then its perfectly fine to have a laser focus on that.
If you dont trust yourself to keep off the credit, you could first start with cutting up the credit card.
If that doesnt work because youve memorized the number or have it saved on too many websites as a payment method, then closing should be the next consideration.
However, if you have other goals in mind, such as buying a car or home, dont close the credit card right away.
For various reasons that well discuss in a minute, that will have an impact on your credit score. So, even though it can prevent you from spending, it could also prevent you from spending on the things you really want for your future.
Closing An Unused Credit Card Without Hurting Your Score
Depending on your situation, you may be able to close an unused without impacting your credit score. For example, if you have multiple credit cards with the same issuer, they may let you transfer your balance from a closed card over to your remaining card.
Consider this hypothetical: You have two credit cards with the same issuer, one with no annual fee and a $3,000 credit limit, and one with an annual fee and a $5,000 credit limit. You want to close the card with the annual fee to save money. You can request that your issuer transfer the $5,000 credit limit to your other card before closing the account. That way you end up with a single credit card with an $8,000 limit.
Transferring your credit limit to another card conserves your total available credit, which keeps your utilization rate the same. So long as the card you close isnt one of your oldest accounts, this can help your credit score remain the same after you close an unused credit card.
That being said, if the main reason youre thinking of closing an unused credit card is the annual fee, you may have other options. First, try negotiating with your issuer to waive the annual fee. Depending on how long youve had the account and how much the issuer wants to keep your business you may get a waived or reduced annual fee.
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Does Closing Credit Cards Hurt Your Credit Score
- Ben Schlappig
While its true that an inquiry on your credit report can ding your score a couple of points short term, in reality there are several metrics that can be positively impacted by opening new credit cards, including lower credit utilization and more payment history.
What matters most is that you dont utilize too much of your credit, that you make your payments on-time, and that you maintain a decent average age of your credit card accounts.
In this post I wanted to answer another question I get all the time what impact does closing credit cards have on your credit score?
While I have nearly 30 credit cards at the moment, I do sometimes both open and close cards as my spending patterns change over time, as does the value proposition of some credit cards. Lets take a closer look at how your credit score is impacted when you close cards.
In this post:
Is It Better To Cancel Unused Credit Cards Or Keep Them Open
If the credit card is one of your oldest cards, you may want to reconsider closing it. By keeping your oldest line of credit open and making consistent on-time payments on it, you can show future lenders that you are committed and able to handle long-term debt.
If there is a large annual fee on the card: Why pay a large fee if you aren’t benefiting from card perks or you no longer find the card useful? But before you close this kind of account, consider whether doing so could worsen your credit utilization by reducing your available credit limits.
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How To Cancel A Credit Card: The Safe Way
There are plenty of reasons to cancel a credit card. However, you should understand what canceling will do to your credit score, because canceling can have a negative impact.
Canceling requires more than just cutting up the card and throwing it out to keep your score intact. The good news is you can minimize the damage or, in some cases, avoid it entirely if you decide to cancel. Heres how you can make that decision and how to cancel a credit card without damaging your credit score.
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