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
Limit Your Use Of Other Credit Cards
While lowering your available credit by canceling a card can lead to a higher utilization rate, thats only true if your overall balance stays the same. By using your other cards less often or by paying down overall credit card debt, you may be able to cancel a card without increasing your utilization ratio.
Some Alternatives To Closing Your Card
If you decide not to close your card but you still dont want to use it for whatever reason, there are some good alternatives to cancelling.
- Put the card awayIf you want to keep the card but youre not using it, put it in a drawer or other safe place. You wont be tempted to use it but it will remain part of your credit file.
- Set up a regular paymentAlternatively, if you want the card to remain active but you dont want to spend a lot with it, consider using it for a small regular payment. Using it for a regular subscription like a streaming service or food and drink delivery will allow you to keep it active but it will be easier to make sure the card is paid off each month with a regular payment set up also.
- Ask for a new cardIf your card has a high interest rate or you want to see if you can get a card with better rewards, ask your provider. You may be eligible for a card with a lower rate and incentives that works out better for you.
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When You Should Close Unused Credit Cards
Although it’s obvious that closing an unused credit card can hurt your credit score if you’re not careful, some circumstances make it worthwhile anyway.
One major reason for closing an unused credit card is if that card comes with a pricey annual fee. That’s not to say that all cards with an annual fee are bad — they can be quite valuable when you make the most of them. But if you’re not using the card, why are you paying for it?
Another time you may consider closing an unused credit card is if you simply don’t want the temptation it represents. Every credit card you have is more you could take on. If you struggle with managing debt, you may want to eliminate any cards you don’t absolutely need.
It Can Raise Your Credit Utilization Ratio
Your credit utilization can be found by dividing the balance on your cards against the total credit limit on all your cards. For instance, let’s say you’re carrying a balance of $500 across all cards, and the total limit on all your cards is $5,000. Your credit utilization rate would be 10% . If you close a card with a $1,500 credit limit and $0 balance, your credit utilization rate would rise to 14% .
The higher your credit utilization, the riskier you seem to creditors and lenders. That’s because it might be a warning signal that you’re in financial hot water or are having problems keeping up with your bills, so you’re resorting to plastic. So where should your credit utilization hover? The rule of thumb is to aim to keep it under 30%. Credit utilization makes up 30% of your credit score, so it’s important to keep your utilization low if you want to maintain a solid score.
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Whats The Best Way To Close A Credit Card
When you cancel a credit card, go into it with an intelligent strategy to minimize any damage to your credit scores. For example, 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 credit score drop for 12 months.
Its also important to avoid canceling a credit card account right before applying for a mortgage or other loan. Even if your lower credit utilization only makes your credit score drop by a few points, that can make a huge difference in which interest rates youre offered by your lender.
The cutoff point for the very best rates is typically 740. So 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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Does Closing A Credit Card Hurt Your Credit
Before closing any credit card account, you need to consider the possible effect on your credit score. Just because you cancel a credit card doesnt mean that its payment information comes off your credit report right away.
In the case of open accounts, positive credit data can stay on the credit report indefinitely. Closed accounts with zero balances and no associated negative information typically remain on a credit history for 10 years from the date they are reported closed.
Most bad marks on your credit report have a quicker expiration date. Under the Fair Credit Reporting Act, negative data such as late payments and foreclosures must come off the credit report after seven years.
If the account is never again positive, is charged off and sent to collections, the original account and any subsequent collection account will be deleted at that time, says Rod Griffin, director of public education with credit bureau Experian. This allows the positive information to remain longer than most negative information.
If a person established good credit, the impact of card closure should be minimal and short-lived.
Christina Goethe, FICO
The ratio is more important today than how much available credit you have, Griffin says. From a lenders standpoint, a low balance-to-limit ratio is a strong indicator of good credit risk, he says. To offset the closure of one account, for example, you can request a credit limit boost on another card in order to maintain the ratio.
Does Using A Debit Card Build Your Credit
Even if you’re using your debit card responsibly and have never overdrawn your bank account, the purchases made with a debit card do not normally help you build credit. They’re different from credit cards, which show up on your credit report and influence your credit score. … It just won’t do much to build your credit.Read more
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Which Is Safer Credit Or Debit Card
Safety is one of the most important factors of difference between a credit card and a debit card. Purchases made using a credit card are safer as compared to debit card. This is because any fraudulent transaction made using your debit card leads to funds being deducted directly from your own bank account.
Choosing To Keep Your Card Open
Just as there are reasons to consider closing your credit card, there are also good reasons you may decide to keep it open:
- Helping manage your credit utilization: If the card youâre thinking about closing has available credit, keeping it open could help keep your credit utilization ratio lower.
- Keeping your credit file robust: If your credit card is one of only a few sources of credit, closing the account could give you a thin credit file. This means you may not have enough credit history to be scored. In this case, you may want to keep your card open to continue building your credit.
- Maintaining a mix of credit types: Your credit score can also benefit from having more than one credit type. This can include things like revolving credit, personal loans or mortgages. If your credit card is your only form of revolving credit, you may want to keep it open to diversify your active credit.
- Preparing to make a big purchase: If youâre planning to purchase something like a house or a car, it helps for your credit to be at its best. Especially when it comes to applying for a loan. In this situation, it could be in your best interest to keep your credit card open for the time being.
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Send A Letter Requesting Card Account Closure Just To Be Sure
For added insurance , write a short cancellation letter to the card issuer. Request written confirmation of the accounts closure.
The letter should include your name, address, phone number and account number, and details from your earlier phone call. Also, state that you want your credit report to reflect that the account was closed at the consumers request.
Along with the letter, include the check number that you used to pay off your account balance.
Make a copy of the letter for your records. Send the letter via certified mail or with return receipt requested, so you can prove the company received your letter.
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Lower Total Credit Available
For starters, your credit score is based on how much of your available credit you’re actually using. This is called your . For a given level of spending, lowering your total credit available gives you a higher utilization ratio.
For example, if the available credit for all your cards combined is $10,000 and you have a total of $2,000 in charges, your utilization ratio is 20 percent . If the card you cancel has a credit limit of $3,000, your total credit available goes down to $7,000. With the same $2,000 in spending, your utilization ratio is now 29 percent. A higher ratio may hurt your credit score. The best scores usually have a ratio between .01-.10, meaning you’re using 10 percent or less of your available credit. Good scores usually fall at or below 30 percent. Anything above this might damage your score.
How Closing Accounts Affects Your Credit History
Your takes into account several factors, one of which is your . It makes up 15 percent of your credit score, so its important to show you have a track record of borrowing and paying back money. The longer your credit history, the better.
Contrary to popular belief, you dont immediately lose the history for a credit card when you close it, said Griffin. He explained that when you close an account thats in good standing , credit bureaus keep that account on your for 10 years from the date its reported closed.
Compare that with negative items such as missed payments, accounts in collection and bankruptcies which generally stay on your report for seven years.
We keep the good stuff longer than the bad stuff, he said. So unless you took out one credit card many years ago and havent borrowed money since, closing a credit card should have no impact on your credit history.
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Monitoring Your Credit After Closing A Credit Card
After closing a credit card, youll likely want to monitor your credit to see how the closure may have affected your credit score. If youre not already using a product to monitor your credit, why not consider ScoreSense?
ScoreSense is a product that will provide you with all three of your credit reports and credit scores. Plus, youll receive daily monitoring, alerts, monthly updates, and credit insights to help you make sense of your scores. Are you ready to start monitoring your credit regularly? Let us know in the comments.
Check Your Credit Report To Confirm The Cancellation
Then sit tight. Getting the card canceled may take a month or more. After that time, take a look at a copy of your credit report to make sure the account is marked as closed.
You can pull a free copy of your credit report once a year from each of the top three credit bureaus at AnnualCreditReport.com.
If the account appears open, repeat the process: Call the customer service number to report the mistake, follow up with a letter by certified mail and then check your credit report again.
If that fails, you can file a dispute through one of the three credit bureaus . And if that doesnt work, you can file a dispute with the Consumer Financial Protection Bureau.
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High Interest Rate Credit Cards
If you tend to carry balances on your credit cards, you can also close the card with the highest interest rates. Of course, youll need to pay off the credit card in full before closing it.
If you do have a balance, you could try doing a balance transfer to a low-interest credit card or even a card with a 0% introductory rate. Just be sure you can pay off the credit card balance before the introductory period ends. Otherwise, you could potentially end up paying an even higher interest rate than before.
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.
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What Are The Disadvantages Of Using A Debit Card
- No grace period. Unlike a credit card, a debit card uses funds directly from your checking account. …
- Check book balancing. Balancing your account may be difficult unless you record every debit card transaction.
- Potential fraud. Most financial institutions will try and protect their customer from debit card fraud. …
What Are Some Alternatives To Closing Credit Card Accounts
If you dont want to take a chance on having your credit score change, you could consider these other options:
- When you call to cancel credit cards, representatives may offer incentives to keep the accounts open. Incentives could include waiving the annual fee or lowering the cards interest rate.
- For secured cards with good payment history, credit card issuers may offer to convert them to unsecured cards, which would not require closing the original credit cards.
- You could also request that your credit card issuer lower your cards limits if you are tempted to spend more than you should. Be aware, however, that lowering limits can increase credit utilization ratios.
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Call The Credit Card Company
To officially cancel, call the number on the bank of your card and talk to someone from the credit card company or bank that issued that card. The customer service representative will most likely try to entice you with attractive offers to keep your card open. Stay strong, and remember your reasons for closing your account.
Closed At The Consumers Request
You should also be sure to close all credit accounts on your own terms. That means dont wait for your bank to close an account because of payment issues. That will hurt your credit score even more.
Also, be aware that any customer service representative you speak to will likely try to convince you that another credit product would work better for you. Dont give them personal details about your reasons for closing the account. Simply be firm about your intentions. Let them know you want your credit report to reflect that you requested the account to be closed.
You dont need a to understand how opening and closing a credit card affects your credit. Youre now armed with the knowledge you need to strategically manage your credit card accounts to get the best possible scoring in the relevant categories.
With a full 35% of your credit score affected by how you use your credit card accounts, there is certainly room for improvement no matter where your number is currently. Before you make any move regarding your credit cards, remember both the long-term and short-term effects those decisions could have on your credit.
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