Unless you are trying to reduce your spending, get rid of unfavorable terms, or avoid a hefty monthly fee, you should avoid canceling your credit card. Canceling an unused or underutilized credit card can help in hurt your credit score if it is not done properly.
In some cases, it can make sense personally for you to cancel your credit card. This may be due to the temptation to spend more than you have, or it might simply be due to the terms no longer being optimal. It may even be because you have too many cards open, which is a potential credit score risk factor. Below are some of the reasons why you should cancel a credit card, and a guide to what happens when you cancel a card.
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What Happens When You Cancel a Card
It’s vital to know what canceling a card will do to your credit. This is not a decision that should be taken lightly.
As canceling a card effectively closes that account, it affects two significant factors of credit: the average age of accounts (AAoA), and credit utilization ratio.
Older accounts mean a longer credit history, and they generally give more confidence to lenders considering working with you. Many consumers are unsure whether closing a credit card hurts your credit score. A closed account falls off your credit report 10 years after you close it and continues to age until about a decade later when it is taken off your report.
The more pertinent hit to your score, however, is your credit utilization ratio. While a closed account will still contribute to your score, the lack of associated credit availability will only be a detriment. For example, if you decide to close an account that you just paid off, with $0 out of $3,000 used, you lose the 0% utilization of that card, which is far better than the recommended maximum of 30%.
A good rule of thumb is to keep your oldest account open. It may also have your highest credit limit, and keeping the utilization on an old account down contributes to both factors — the average age of accounts and your credit utilization ratio.
However, there may still be reasons you want to close your account.
Good Reasons to Cancel a Credit Card
Although you should aim to keep credit cards active even if you aren’t using them, there are some specific scenarios that are viable reasons to cancel a credit card. If you choose to do so, it is important to know how to close credit card accounts while preserving your credit score.
If you already have too much debt and are trying to curb bad credit card spending habits, it could be wise to cancel cards that you haven’t maxed out. While there will be a credit hit, it may help with the temptation to keep spending. This is especially true if you have too many credit cards already.
While this may be a good personal reason, it will hurt your credit score. Consider debt consolidation in addition to closing the card in this case. Consolidation can help curb temptation, and it can help you avoid a surplus of payments to make each month.
Cosigners and Authorized Users
If the account remains open and there are cosigners or authorized users with bad spending habits who are still making charges, it could wreck your account, piling up debt and potentially hurting your credit score. Even loved ones can ruin your credit. This becomes especially true after divorce.
While it’s possible to close this account, it may be more worthwhile to remove the authorized user from the account if you have the ability to do so. For cosigners, you may be forced to close the account. Or, if possible, you could switch to a product with the same lender, such as a different card with new account permissions. This may only be an option if you have a good credit score.
You may take a credit hit for this, though in the long run, it will be beneficial — especially if the cosigner/authorized user is already hurting your score. Removing them or closing the account is the first step towards repairing your credit.
If your card has annual fees that you no longer want to pay, you may consider closing the account to avoid the fees. Depending on the card, the fees could be anywhere between $50 and $500, a significant price to pay each year, especially if you do not redeem the rewards.
Before closing the account, however, consider switching to a card with downgraded rewards that might have no annual fee. This tactic is a favorite among credit card churners, who open cards, earn rewards, and keep cards open to keep their credit high. You may also be able to negotiate with the lender’s customer service to get the fee waived.
If the card has a high interest, low credit limit, or any other unfavorable terms, it may be time to cancel the credit card. If your credit score is good, you may be able to renegotiate the terms, or increase your credit limit. If your credit score is bad or fair, though, closing the card might be the better option (at least until you can build or repair your credit).
However, keep in mind that while a low limit won’t hurt credit utilization much, closing a credit card with a high APR — if you pay on time and keep the utilization low — could be a detriment to your score.
For the most part, closing a credit card account should be a last resort. If possible, switch to a different credit card instead, or simply leave the card open. While the lender may eventually close the account, if the card does not have an annual fee and has no balance, it will only serve to help your credit score.
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