Keep Tabs On Your Credit To Understand Changes
Your score may also drop if there is an error on your , such as an inaccurately reported late payment from your credit card issuer. It’s important to regularly monitor your credit report so you can take note of any updates to your accounts that could affect your scoreand to recognize, and take action on, any inaccuracies that could negatively impact it.
Canceling A Credit Card May Affect Your Scoreheres What You Should Know
May 11, 2021 |8 min read
There are many reasons you might be considering closing a credit card account. You may be trying to limit your amount of revolving debt. Or you might not be using a particular card any longer.
Whatever your goal, one question you might consider is how closing a credit card could impact your credit score. The answer varies based on your personal circumstances, but there are things to keep in mind before making a decision.
Divorce Or Separation From A Spouse
Sometimes life events make canceling a credit card the best choice. If you are getting a divorce or separating from a spouse, disentangling your finances might be one of the first steps you take. When it comes to credit cards, this means canceling joint credit cards or removing yourself or your spouse as authorized users to protect yourself from unauthorized spending.
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Reasons A Credit Card Issuer May Close A Credit Card With A Balance
On the other hand, the account may not be in good standing. You may have missed a few payment cycles, and, if so, the credit card issuer may see it as a red flag signaling that youre in financial trouble.
The concern would be that you will start to use the rest of the credit line and then not pay at all. To prevent that from happening, the issuer may close the account.
An issuer may close your account if youve missed payments or otherwise appear to be in financial distress that would cause you to miss future payments.
Another reason an issuer may take preemptive action and close the card is that your debt exceeds the allowable charging limit. That can happen when youve maxed out the credit line and then skipped a payment cycle so late fees were added.
Over-limit fees may also have been applied in that situation. And interest will be assessed on the balance, which will cause your balance to go even further over the limit. This too is a warning to an issuer that your finances may not be in healthy shape, so it may decide to pull your charging rights and close the card.
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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Dispose Of Your Card Properly After Confirming Cancellation
After documenting the cancellation process and making sure that your credit report reflects the closed account, you are finally free to discard your credit card. There are a few ways to destroy your plastic or metal card, but youll need to pick a disposal method that leaves your information completely unrecoverable from identity thieves.
If you do decide to pick up the scissors, make sure that you are cutting each bit of information including your card number, CVV, expiration date and signature.
Although it may be worth temporarily holding off on closing a credit card if you are in the market for a new loan or mortgage, canceling a credit card shouldnt be a source of major concern for consumers with good credit, since the resulting impact on their credit scores is likely to be minimal and temporary.
Closing Multiple Credit Cards
If, as demonstrated above, closing even one credit card account can cause downstream damage to your credit score, imagine the harm closing multiple cards at once can wreak.
Again, balances and reports of late payments arent going away just because you shutter an account. Instead, youll almost certainly wind up drastically dropping your average-account age while causing your credit utilization to spike.
Above all, then, if your close-my-accounts resolve is firm, do all you can to hang onto your oldest cards, as well as those with the highest credit limits.
Before acting rashly consider healthy alternatives to closing your credit cards:
- Contact your creditors about putting a freeze on your spending.
- Freeze all but a single, must-have-for-emergencies card in a block of ice.
- Whip out the scissors. Cut them up. Or feed them to a nearby shredder.
- Alternately, Finder.com credit card analyst Kevin Chen suggests you give all but your emergency card to a trusted friend or relative to put in safekeeping for a specified amount of time.
- Stash your cards in a safe deposit box.
- Experts agree: Erase all your stored credit information from internet shopping sites.
The idea and its a good one is to make access to your cards and credit inconvenient.
Yet another reason cash is king. Wait. Theres more.
If whats brought you to the brink is a crisis in managing your credit card and pile-on debt, you should consider going through a .
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Can I Have Closed Accounts Removed From My Credit Report
When you pay off and close an account, the creditor will update the account information to show that the account has been closed and that there is no longer a balance owed. However, closing an account does not remove it from your credit report. Your credit report is a history of your accounts and payments.
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.
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Check Your Credit Report
Before you close your card, check your credit report and check for any errors. You can order a free report every 12 months from each of the three credit bureaus — Equifax, Experian and TransUnion — from AnnualCreditReport.com. If you see any mistakes in your account history, such as payments mistakenly being reported as late or missed or payments being reported to the wrong account, you can file a dispute. The credit bureau has 30 days to review and respond to your dispute. After you’ve closed your account, it’s a good idea to review your credit again and watch for errors. Common errors that could pop up after you’ve canceled a card include an account showing up as being open and active even after you closed it, or your credit report missing the “Closed by grantor” notation. It should be clear that the account was closed by the creditor.
Utilization Rates Matter A Lot Too
When opening and closing a card, often the biggest immediate impact of the move is on your utilization rate. If you owe $1,000 and have $5,000 in available credit, your utilization rate is 20%, which most any credit expert would tell you is an OK rate .
$1,000 balance / $5,000 available credit = 20% utilization rate
If you open a new card with a $5,000 credit limit, suddenly the equation changes. Your total available credit jumps to $10,000 and your utilization drops to just 10%.
$1,000 balance / $10,000 available credit = 10% utilization rate
Close a card, and the shift can be more dramatic. If that closed card reduces your total available credit to just $2,000, your utilization rate is a suddenly unacceptably high 50% and your credit score is likely to suffer.
$1,000 balance / $2,000 available credit = 50% utilization rate
Those are significant changes, just from the act of closing or opening the card. However, the LendingTree data analysis again indicated that what people do afterward can have a major effect on how big those changes are.
Just over half of those who open a new card increase their utilization rate, resulting in an average 19-point drop in their VantageScore. Among the other 49%, the average score increased by 7 points.
When looking at those who closed cards, 57% saw their utilization rate jump and their average VantageScore fall by 10 points. The remaining 43% lowered their utilization and saw a 14-point jump.
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how Your Credit Score Is Calculated
Letâs review how your credit score is calculated. Remember that âcreditâ is a tool you can use to pay for something without physically having the cash in your wallet, on the promise that you will repay it. Typical forms of credit include: credit cards, lines of credit, mortgages, and student loans. How you use your credit is ultimately what determines your credit score and is calculated based on the following key criteria:
How Closing A Credit Card Impacts Your Credit Score
Closing a credit card account can have a big impact on your credit score. When you close an account, the credit card company will report your account as closed by consumer or account closed by merchant to the credit bureaus. This will lower your average account age and could lower your credit utilization ratio, which is the amount of available credit youre using compared to your total available credit.
This can improve your credit score.There are some exceptions to this rule, though. If you have a rewards credit card and you plan to use that rewards money before closing the account, it may make sense to keep the card open.
Similarly, if you have an introductory APR that is only offered for a limited time, it may be worth keeping your account open until the introductory APR expires.In addition to closing an account, canceling a subscription may affect your credit score. Learning how closing a credit card impacts your credit score can help you make more informed decisions.
What About My Debt
Debt-to-credit ratios are an important factor for credit scores in the US, showing how much debt someone is carrying versus the amount of credit they have access to through cards and other accounts. Cancelling a card could affect this ratio by reducing the amount of available credit.
As there is a lot of information online about US credit ratings, this term often comes up when you’re searching for details on Australian credit scores. However, debt-to-credit ratios are not a factor for credit scores in Australia because our credit files only show the maximum amount of credit available .
Finder confirmed this with credit reporting bureau Experian’s general manager of credit services for Australia and New Zealand, Tristan Taylor, who told us “no credit bureau can report the balance on credit cards or any other facility”.
The privacy act explicitly states which data elements can be collected and shared by a credit bureau, and balance is not one of them.
Tristan Taylor, Experian
Taylor said the main elements relating to a credit facility that a credit bureau can collect and share are:
- Type of credit
- Term of loan
- Repayment behaviour
So, your credit score is based on the total amount of credit you have access to, as well as repayment history and applications for credit. But when you apply for a credit product, lenders may factor in the amount of credit you owe as well as your total access to credit, as part of their assessment.
Ways Cancelling A Credit Card Could Hurt Your Credit Score
If your credit history also shows you’ve recently made some late payments or have defaulted on accounts, cancelling your card might hurt your score or leave it unchanged.
- If you have a lot of recent applications. Applying for a lot of credit cards over a few months increases the level of risk for your existing and potential lenders. It may suggest that you’re struggling with debt or that you’re jumping from one credit card to another in order to take advantage of introductory offers. While there’s not technically anything wrong with that, credit card companies do frown on this type of behaviour.
- If it was your only credit account. Cancelling a credit card when you don’t have any other loans or credit accounts limits the amount of information you’ll have on your credit file. That means your credit score could drop or remain unchanged until you apply for a new card.
- If making payments on your other accounts is still a challenge. While cancelling a credit card could be a step in the right direction, you may still find that it’s difficult to make payments on your other accounts. This could lead to more late payments or defaults that lower your credit score. If you need help dealing with your credit accounts, you can get free support by calling Financial Counselling Australia on 1800 007 007 between 9:30am and 4:30pm Monday to Friday .
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When It Makes Sense To Cancel 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 a few reasons you might want to close a credit card:
Alternatives To Closing Your Card
Closing your credit card isnt the only measure you can take, especially considering the potential damage to your credit score.
Keep in mind the two credit cards you may want to keep around: your oldest and the one with the highest credit limit. These will limit the damage to the length of your credit history and your credit utilization ratio.
If youre keeping a credit card you dont use much but are looking for some ways to make it more beneficial, consider switching to another credit card from the same credit card issuer. Take a look through their current offerings to see whether theres a comparable credit card that would be a better fit for you. Some issuers allow you to switch credit card accounts, or change products, without a detriment to your credit history, but you likely will not be able to take advantage of new-customer sign-up bonuses if you change credit card products with the same issuer.
If the credit card you want to cancel has a high interest rate, consider transferring the balance to another, lower-interest, card. Youll be able to keep your card and pay off the balance at a lower rate. Keep the old credit card active by making a small purchase each month and then paying it off in full.
Finally, if youre having trouble resisting the temptation to spend, you can put your credit card awayor cut it upat least until youre finished paying off your debt.
Should I Close My Credit Card Account After Paying It Off
Like any financial product, credit cards are tools that can be used well or poorly. If youre someone who has a good track record of credit card use and pays their balance in full every month, then keeping a credit card account open is good for your credit score. If youre someone who has a bad track record of credit card use or only pays the minimum each month, then closing your credit card account may be the best option.
If you do close your credit card account, remember that your credit score will drop due to the reduction in available credit you have. Also, keep in mind that it is easy to re-open a credit card account if you need to, so closing your account shouldnt be viewed as a final decision.