Will Canceling a Credit Card Affect Your Credit?
Opting to cancel a credit card may not always harm your credit score. Although it's often recommended to keep your accounts open, closing a credit card isn't universally detrimental. Achieving a zero balance across all your credit card accounts prior to cancellation is crucial to preventing a potential drop in your credit score. Maintaining low or zero balances can prevent increases in credit utilization, which may impact your score adversely if not managed well. It's essential to identify valid reasons for closing an account, such as separating joint accounts during a divorce or avoiding high annual fees imposed by some credit card companies.
Important Insights
- Despite Common Advice Sometimes, it's necessary to close a credit card account, even if it is typically advised against.
- Keeping Your Score Safe Canceling a credit card doesn’t have to damage your credit score. If managed strategically, you can avoid negative impacts.
- Managing Balances Paying off all credit card balances, not just the one being canceled, is critical to protecting your score.
- Impact on Credit History Closing a charge card will not change your credit history. Since history factors into your score, it remains a vital component.
- Credit Utilization Remember, closing a card could lead to higher credit utilization on other cards if balances aren't managed, possibly lowering your score.
Understanding the Effects of Using a High Percentage of Your Credit
If you're thinking about closing a credit card, it might be worth reconsidering. Reducing the number of cards you have can increase the proportion of your available credit that you're using, which is known as the credit utilization ratio. This increase can lead to a decrease in your credit score. It’s vital to understand how your outstanding debt, available credit, and credit limits factor into this calculation.
Consider your overall available credit. If you have two credit cards—one with a $1,000 limit and a $1,000 balance, and another with a $1,000 limit but a $0 balance—your credit utilization across these cards stands at 50%. This percentage is derived from dividing your total balance by your total credit limits ($1,000 ÷ $2,000).
If you choose to cancel the second card, your credit utilization ratio shoots up to 100% because you're left with just one card—$1,000 in balance and $1,000 in limit. A higher ratio like this can significantly impact your credit score.
To manage this, keep your credit utilization at 30% or lower. This means if you have a total credit limit of $10,000 across all cards, you should try to owe no more than $3,000.
Paying off your card balances each month is one strategy that can help maintain a healthy credit profile. By doing so, you not only improve your financial health by avoiding interest charges but also keep your credit score in check. Before closing any credit accounts, ensure your credit reports reflect a $0 balance across all cards. This approach will help prevent any negative repercussions on your credit score when you decide it’s time to close an account.
Valid Reasons to Shut Down a Credit Card
Ending a Relationship or Marriage
Closing joint credit card accounts during a separation or divorce can prevent future financial complications. As a joint holder, you're equally liable for any charges made to the account. It's possible for an ex-partner to incur substantial charges out of anger, leaving you with the responsibility to pay.
Even routine expenses made on the card post-separation are your problem too. Despite what a divorce decree might specify regarding who pays the debt, your lender will still hold you accountable for it.
Steep Yearly Charges
If your credit card comes with a hefty yearly charge and you don’t use it, it might be wise to cancel. However, if the perks and rewards, such as travel credits, outweigh the annual charge, keeping the card could be beneficial.
For a card that provides no advantages, consider contacting your card issuer to request a waiver of the annual fee. Communicating your intent to cancel might lead to unexpected positive outcomes.
Overwhelming Spending Urges
For some individuals, credit cards—especially store-specific ones—are just too tempting. While this might justify closing an account for certain people, there are alternative methods to manage spending without damaging your credit score.
One approach is to remove credit cards from your everyday wallet and place them somewhere secure. By not having immediate access, you might find it easier to reduce impulse spending.
Once you close a credit card, reopening the account is not an option.
How to Close a Credit Card: Six Steps
Canceling a credit card requires some careful steps to ensure everything is handled properly. Start by redeeming any unused rewards linked to your account. Ensuring all rewards are utilized can prevent any loss of points or benefits before the closure process. Strive to pay off your credit card balances entirely, not just the one you plan to cancel. A zero balance can simplify the cancellation process and prevent future complications.
Next, contact the customer service of your credit card issuer to inform them of your intention to close the account. During the call, verify that your account balance is indeed zero. Send a certified letter to the credit card company to formalize the cancellation. Request written confirmation that shows both a zero balance and the account's closure.
After 30 to 45 days, check your credit reports to see that they reflect the account as closed by you and that the balance is zero. If you spot any errors, dispute them with the credit bureaus promptly to maintain accurate records.
Closing a Credit Card Will Not Erase Your Credit History
Closing a credit card does not result in the instant loss of its recorded age in your credit history. When a credit account is closed, it continues to appear in your credit reports. As long as the card stays on your report, the age of the account is considered by both FICO and VantageScore models. The record remains for seven years if the account had negative data or around ten years if it was positive. Therefore, closing the card doesn't lead to an immediate impact on the length of your credit history, a key aspect of your financial profile.
15%
The age of your credit accounts forms 15% of your FICO credit score. The length of your credit history plays a substantial role in figuring out your creditworthiness, although it ranks behind payment history and the amounts owed, which represent 35% and 30%, respectively. Thus, keeping older accounts active when possible can support a more robust credit profile, suggesting the strategy of carefully choosing which card to close, especially if it has been a part of your financial journey for a significant time.
Effects of Canceling a Credit Card on Your Credit Score
Closing a credit card can alter your credit utilization ratio, which is crucial for calculating your credit score. This ratio assesses how much of your available credit you're using. Maintaining a utilization rate around 30% is advisable. A higher rate may lower your credit score.
Strategies to Maintain a Low Credit Usage Rate
Managing your credit usage rate effectively involves several key practices. First, consistently pay off your balance each month. This not only helps in maintaining a low credit usage rate, but also prevents interest charges. If your cards reflect zero balances on credit reports, closing an account won't negatively impact your score.
If you have a good track record with timely payments, consider requesting an increase in your credit limit. This action reduces your credit utilization rate. Be cautious; avoid accumulating additional balances, as this might increase your usage rate, counteracting the benefits of a higher limit.
Will Closing a Card Damage My Credit History?
When you close a credit card account, it doesn’t automatically erase it from your credit reports. A closed credit card with a good history can remain on your credit reports for up to a decade. This means it still contributes to the average age of your credit.
