Dealing with credit can be difficult, so it’s important to consider the repercussions of closing a credit card account.
Your creditworthiness is determined by your credit score, and it can be impacted by things like your credit utilization ratio, the average age of accounts on your credit report, and the total number of open accounts.
In this article, we’ll look at how cancelling a credit card may affect your credit score, and when it can be a good idea to do so.
We’ll also look at other options besides canceling a credit card, such as downgrading to one with no annual fee or switching to a secured card, and how to properly close a credit card account in order to avoid any negative effects it might have on your credit score.
How Closing a Credit Card Will Affect Your Credit Score
Closing a credit card account can have a direct negative impact on your credit score, as it reduces your available credit limit.
The credit utilization ratio, or the percentage of available credit you’re using, is hugely impactful in calculating your credit score.
When closing a credit card, you have less available credit thus increasing your credit utilization ratio.
Lenders consider this an indication of risk, as it implies that you’ve used a greater proportion of your available credit.
It is recommended by experts that your credit utilization ratio be kept below 30%, with a lower rate often being preferable.
Divide the sum of all your credit card balances by the total value of all your credit limits to calculate your utilization ratio; this percentage is your credit utilization rate.
When you close a credit card account, it can shorten the average age of accounts on your credit report, which may negatively affect your credit score, especially if said account has been open for an extended period.
Your credit score is impacted by the age of your accounts; longer payment histories will create a more favorable assessment.
It’s important to keep in mind that even if you close your account in good standing, it will still appear on your credit report for 10 years, and will be considered when calculating credit scores throughout that period.
Your credit report will contain closed accounts with missed payments for a period of seven years.
It’s important to remember that when you close a credit card your scores may go down temporarily but they can recover in a few months as long as you make all payments on time.
If you’re looking to apply for a mortgage or auto loan within the next few months, it’s best to avoid cancelling any existing credit cards.
When Canceling a Credit Card Makes Sense
Under certain circumstances, closing a credit card may be the most prudent choice even though it may adversely affect your credit score.
High annual fee
A frequent cause of canceling a credit card is the high annual fee. If the advantages of possessing the card are not worth the annual subscription fee, it may be wise to cancel it.
High interest rate
If you are paying a high interest rate on your credit card balances, then it might be beneficial to cancel the card and choose one with a lower rate.
Difficulty managing debt
If you find it hard to control your spending and are unable to repay your debt, it’s best for you to discontinue using the card and focus on paying back what’s due.
Upgrade to a better rewards card
Opting for a card with a better rewards program or more perks could be the right move if you wish to upgrade, meaning you may need to cancel your current card and apply for a new one.
Before you decide to cancel a credit card, it’s important to think about how it will affect your credit score and if the benefits outweigh the drawbacks.
Furthermore, if you’re thinking of canceling a credit card, it’s a smart move to have a plan in place for settling any remaining payments and decide on another card to guarantee that you don’t lose your credit record.
When It’s Better to Keep the Card
Sometimes canceling a credit card is recommended, but in certain cases, it’s better to keep the account active.
Oldest account on credit report
If the card you’re thinking of closing is the oldest one on your credit report, doing so will reduce the average length of time your accounts have been open and can hurt your credit score.
Thin credit file
Having a limited number of open credit accounts can lead to a thin credit file, making it difficult for you to access further credit in the future if you decide to close one of them.
Infrequent use
If you’re only canceling your card because you don’t use it frequently, it may be a better idea to keep the account open and occasionally use it to build up a longer credit history.
Even if your credit card account is in good standing, it’s important to bear in mind that closing it can have a detrimental effect on your credit score.
Before canceling a credit card, it is essential to examine all of your options and how it might affect your credit score.
When deciding whether or not to close a credit card account, it is recommended to keep it open if it is the oldest account on your credit report, you don’t have many other open credit accounts, or you simply don’t use it very often.
It’s important to consider all options and the potential impact on your credit score before making the decision to close an account.
How to Close a Credit Card Safely
If you have determined that terminating a credit card account is the appropriate option for you, it is essential to take the necessary steps to cancel it correctly in order to prevent any negative effect on your credit score.
Pay off any outstanding balances
Before you close a credit card account, make sure to clear any remaining debt that is owed. Failing to pay off a closed account balance may result in a higher credit utilization ratio and ultimately lower your credit score.
Redeem any rewards or points
Be sure to utilize any rewards or points associated with the card before closing the account.
If you’re thinking of canceling your card because of the annual fee, it might be worthwhile to contact your issuer and ask if they can waive or reduce the fee; if not, consider replacing your card with one that has no annual fee.
Monitor credit reports for errors
Once the account is closed, check your credit reports for any mistakes. Confirm that the account is completely closed and there are no remaining balances or fees.
When considering canceling a credit card, it is essential to take the proper precautions to ensure it will not hurt your credit score. This includes carefully closing the account in a way that minimizes any damage to your credit score.
To close a credit card account with minimal impact on your credit score, make sure to pay off any outstanding balances, redeem any rewards or points, consider downgrading to a card with no annual fee, and monitor your credit reports for errors.
Alternatives to Canceling a Credit Card
Before closing a credit card account, it’s wise to consider other options instead of canceling as there may be cases where this is advisable.
Downgrade to a card with no annual fee
If the annual fee is what’s making you want to cancel your credit card, call the issuer to see if they can waive or lower it. Otherwise, see if they offer a card without an annual fee.
Convert to a secured card
If you’re having difficulty dealing with your debts, look into changing your credit card to a secured one. With a secured card, you will have to put down a deposit which acts as security for your credit limit. By limiting spending and building credit, you can better control your finances.
Keep the card open and use it occasionally
If you’re only canceling a credit card because it isn’t being used regularly, it’s better to keep the account open and use it occasionally in order to build a longer credit history.
Transfer the balance to a new card
If you’re cancelling a credit card due to its high interest rate, consider transferring the balance to one that has a more favorable rate.
It’s important to weigh the pros and cons before canceling a credit card. You may want to consider solutions such as downgrading to a no-fee card, changing to a secured card, retaining the account but using it infrequently, or transferring the balance to another card.
You can use these alternatives to reach your financial goals without damaging your credit score. Before making any financial decisions, it’s important to consider all potential outcomes and seek professional advice.
Prior to making any decisions, it is important to take into consideration your individual circumstance and credit score. Additionally, different alternatives can assist you in reaching your financial objectives.
Final Words
At times, closing a credit card account may be the right choice for you even though it can negatively affect your credit score.
Before canceling a credit card, you should evaluate the effects on your credit score, pay off any existing debts, redeem rewards and points, and keep track of credit report discrepancies.
Furthermore, you can consider other choices like opting for a card without a yearly fee, getting a secured card, keeping the card active but using it only occasionally, or transferring the balance to another card.
Before making a decision, consider the advantages and disadvantages of each option and consult with a financial advisor.
Prior to making a decision, it is essential to take into account your unique circumstances and credit score.
