Clinging to credit cards that you no longer want or need may seem like a waste of space in your wallet. But closing credit cards, even if you don’t use them, can affect your credit score. That doesn’t mean you have to keep all your cards forever. But you should be careful about which credit card accounts you close and when.
How A Closure Can Hurt Your Credit?
Every credit card that is reported to credit agencies will be included in your credit score. That is, how you use the card will play a role in how your credit score moves. Closing a credit card can affect your credit score in a few important ways, and, unfortunately, the effects are rarely positive.
When you close a credit card, especially one that has a balance, the credit limit is no longer included in your credit score. So. your credit utilization rate can immediately skyrocket. Your credit utilization rate measures how much of your total available credit you are using. Credit utilization is based on the total credit available across all cards, including on a credit card basis. If you lose some available credit but carry the same level of debt, your ratio will increase.
Since occupancy accounts for 30% of your score, this is a factor to watch out for.
Your credit “age” may decrease. Good credit accounts are included in your credit report for up to 10 years. So it may take a while for this to affect you. Eventually, the credit card will drop your credit report because it is no longer active. If you close your oldest account, your credit score could drop in 10 years if this account drops from your credit report. When closing a credit card account, you should consider accounts with the shortest credit age while weighing up the impact of a lower credit limit on your credit utilization now and in the future.
If you do not have many other credit cards or loans, this could leave you with a thin credit file. Meaning there is not enough information a creditor can evaluate.
Your credit mix may be affected. The credit mix is 10% of your score. Proving that you can handle different types of credit helps increase your credit score. If you close your only credit card. It might make you look less experienced in dealing with different types of credit accounts.
It doesn’t matter who has closed the credit card – you or the card issuer – the impact on your credit score is the same.
If It’s OK To Close A Credit Card
Sometimes closing a credit card is the best decision for your credit card and your finances. Maybe you close a credit card that has become more expensive than it is worth. This can happen when the annual fee increases or the rewards program is no longer as lucrative as it used to be. A high annual percentage rate could also be a motivating element for closing a credit card. Remember that you can avoid the cost of a high-interest rate by taking advantage of the grace period and paying off the balance in full each month to avoid interest charges on your balance.
If you are trying to get out of debt and cannot resist the temptation to spend. Closing a credit card is worth any temporary damage to your credit score. Otherwise, you could derail your progress in debt repayment by driving up fees further.
After all, you could close a secured credit card or store a credit card that you used to start or restore your credit. At a certain point, these might have been great options. But since you qualify for better credit cards – with rewards programs or lower interest rates. It’s fine to let go of previous credit cards that no longer benefit you.
Alternatives To Card Closure
Closing your credit card is not the only way to resolve the situation. Especially considering the potential damage to your credit score.
TIP: Think of the two credit cards you might want to keep with you: your oldest and the one with the highest credit limit. These will limit the damage in terms of the length of your credit history and your credit utilization.
If you keep a credit card that you don’t use much but are looking for ways to make it more advantageous. Here are a few suggestions. Think about switching to another credit card from the same credit card issuer. Check out your credit card issuer’s current offers to see if there is a comparable credit card that would suit you better. Some card issuers allow you to switch credit card accounts or “switch products” without making a hard move in your credit history. But you probably won’t be able to get a new customer bonus if you switch credit card products with the same issuer.
If the credit card you wish to cancel has a high-interest rate. Consider transferring the balance to another card with a lower interest, card. You can keep your card and withdraw the balance at a lower cost. Keep the old credit card active by making a small purchase each month and then pay it off in full.
Finally, if you have trouble resisting the temptation to spend. You can put your credit card away – or cut it off – at least until you have paid off your debt.