Check Credit Score Impact
Closing a credit card wont immediately affect your length of credit history by lowering your average age of credit. Even after you close a positive account, it may remain on your credit for up to 10 years. Yet closing a credit card could raise your overall credit utilization rate and possibly lower your credit scores.
To mitigate potential credit score damage, you should make a plan to keep your credit utilization rate low even after you close the account. One option is to pay off all your credit cards before you close an account, especially the account youre closing. To ensure the $0 balance is reported to the credit bureaus, its best to pay early a few days before your statement closing date. Of course, if your overall credit utilization is already 0%, closing a card wont change that figure.
Another option is to open another credit card before you close your other account. Lets say you plan to close a credit card with a $15,000 limit. If you open a new account and receive the same limit or a higher one, your utilization shouldnt be impacted negatively. You will, however, have a new hard inquiry, and the new account itself may lower your average age of credit. These actions might result in lower credit scores, at least temporarily, so weigh these factors in making your decision.
Why Does Canceling A Credit Card Affect Your Credit Score
Your credit score is largely based on how well you manage open credit accounts. Once you close the account, the average age of accounts in your credit report will lessen.
If the account is closed, there is nothing to go off of except the account history before you closed the account .
An excellent credit score reflects that the individual has had long term, well-managed credit accounts.
Also, while it is true that too many open credit card accounts can hurt your credit score, the key is to shy away from opening too many accounts, not closing the accounts.
Bottom Line: Never close an open credit card account it can hurt your credit score.
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.
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Understanding The Impact Of Credit Utilization Ratio
Credit experts advise against closing credit cards, even when you’re not using them, for good reason. Canceling a credit card has the potential to reduce your score, not increase it, says Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report.
Closing a credit card can impact your , potentially dinging your credit score. Credit utilization measures how much of your total available credit is being used, based on your . The more available credit you use , the worse the impact will be on your score.
Heres a simple example of how closing a $0 balance credit card backfires:
- Your credit utilization on both cards combined is 50%.
- Close credit card number two, and your credit utilization jumps to 100%.
You should aim to pay your credit card balances in full every month. Doing so not only protects your credit scores, it can also save you a lot of money in interest.
Paying your balance in full is especially important before closing a credit card account. Provided all of your credit cards show $0 balances on your credit reports, you can close a card without hurting your credit score.
The higher the utilization ratio, the more it can negatively impact your score. That’s why it is commonly recommended to keep the ratio below 30%.
You Want To Upgrade To A Rewards Card
If you’re planning to close an account because you want to upgrade to a different card, ask the issuer to transfer your account to the new card instead. Balance transfers don’t usually incur direct changes to your credit score, but opening a new card may. This could be an increase or decrease in score depending on the circumstance and other factors in your credit history.
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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.
When It Makes Sense To Cancel A Credit Card
Closing a credit card will affect your credit score. And while a lower credit score can make it more difficult to qualify for loans, it may be the right decision.
Here are a few reasons Id close a credit card:
Consolidating accounts: When I was in college, I needed any credit card that would approve me. I didnt have much credit and options were limits. Over time, I got better accounts and my financial system got more complicated. This happens to all of us. Add in company cards, a spouse, children, and things start to get out of hand. If you have an old credit card that you havent used for years and really want to simplify things, you can close it. Keep in mind that closing an old card can impact the age of your credit. Its a trade-off between credit score optimization and overall simplification. Id rather have the simplicity myself, I cancelled my oldest cards that I no longer use.
Running from a big bank: This is the other one time I cancelled one of my credit cards. I had a Wells Fargo card and bank account. 3 months after depositing a check, they decided the check wasnt any good, withdrew all my funds, and hit me with a ton of fees. My Dad wrote that check and had the funds, it was good. And no one at Wells Fargo could ever tell me why the check was reversed so long after being deposited. I was furious. I cancelled all my accounts with them, left, and never looked back.
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How Does Closing A Credit Card Affect Your Credit Score
Your credit score might be hurt if closing the card changes your credit utilization ratio. Credit utilization measures how much of your total available credit is being used, based on your credit reports. The more available credit you use the worse the impact will be on your score. Aim for a ratio of around 30%.
Your Card Has A High Interest Rate
If your card has a high interest rate, it makes sense to avoid carrying a balance on the card. You don’t need to close the card to avoid interest if you make sure to pay off the balance every month or simply don’t use the card.
Make sure you only charge items you can pay off in full to avoid interest and keep the account open. You’ll need to use the card occasionally to avoid having it closed by the card issuer, but it only takes a small charge every once in a while to avoid closure.
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How Does Closing A Secured Card Hurt Your Credit
Secured cards arenât always reported to the credit bureaus. But if yours is, closing your card could impact some of the factors that make up a typical :
- This is about how much credit youâre using compared with how much you have available. When you close a credit card, youâre reducing your available credit. This could tip your over the 30% maximum that the Consumer Financial Protection Bureau says experts recommend. And that could lower your scores.
- Length of credit history: Closing any of your accounts could reduce the average length of your credit history. A secured credit card might have an even bigger impact if itâs one of your oldest credit accounts.
- Letâs say you have a secured credit card and a private student loan. Thatâs a combination of revolving credit and installment credit accountsâa credit mix. A good mix can be good for your credit score because it shows you can handle different types of credit. Closing your secured card could negatively impact your credit mix, especially if itâs your only form of revolving credit.
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.
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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.
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
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What Should I Do If I Have An Unused Credit Card
Should you cancel unused credit cards or keep them? Thereâs no one right answer, and several factors to consider. For example, cancelling a card may:
- Reduce the risk of fraud â an open account you hardly ever check up on may be more vulnerable to fraudsters, who may pretend to be you in order to spend money in your name.
- It can be good to show lenders that you can successfully manage multiple credit accounts, as they may see this as evidence that youâre a reliable borrower. So, cancelling a long-held card could put you at a disadvantage, depending on what the lender is looking for. Whatâs more, cancelling a card may increase your credit utilisation â the proportion you use of your available credit â which can also lower your score. For example, if you have an overall limit of Â£1,000 and you use Â£250 of it, your credit utilisation is 25%. But say you cancel a card and your overall credit limit shrinks to Â£500 â if youâre still using Â£250 in credit, your credit utilisation will now be 50%.
Things To Consider When Cancelling A Credit Card
As mentioned earlier, there is no standard procedure to cancel a credit card. However, when you want to cancel a credit card, the right way to go about it is making sure that certain things are followed. Following the things listed below helps you minimize the damage that closing a credit card can have on the credit score.
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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.
Which Accounts Do I Close
If you must close an account, consider avoiding closing your oldest ones. The longer an account has been open, the better it is for your credit score. This is especially true if youre younger and have a less substantial credit history. Closing an account early in your credit history may indicate risk and negatively affect your credit score. Instead, consider canceling cards with high interest rates or annual fees.
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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
Can You Downgrade To A No
If youre closing a credit card because youre not getting enough value to offset the annual fee, consider asking the card issuer to downgrade your account. By downgrading your card to a different product such as from the Capital One Venture Rewards Credit Card down to the Capital One VentureOne Rewards Credit Card with no annual fee you might protect your credit. But know youll be taking a hit when it comes to card perks.
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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 isn’t 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 you’re 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 you’ve had the account — and how much the issuer wants to keep your business — you may get a waived or reduced annual fee.
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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