Why You Should Think Twice Before You Cancel a Credit Card
Canceling a credit card may seem like the best option, especially if you don’t use it very often- but doing so can lower your credit score. Here are six reasons why you might want to think twice before getting rid of that redundant credit card.
Length of credit affects your credit score
Part of your credit score is made up of how long you have previously held credit for as this indicates that you have a good track record of handling repayments. Because of this, it’s not a great idea to dump a credit card that you’ve had for years as it can mean that your credit score takes a hit.
It won’t help to improve your credit score
Contrary to popular belief, reducing the number of credit cards that you hold won’t automatically improve your credit score. Losing a redundant credit card means that your available credit is reduced, which results in the balance of your other card(s) affecting your credit-utilization ratio. For example, if you have three credit cards with limits of $5000, your available credit is $15,000. If your balance across these cards is $7500, you’re using up 50% of your available credit. If you then ditch one of these cards, you lose $5000 on your available credit, which then drops to $10,000. Assuming that you then transfer the balance of the card that you plan to close onto one of your other cards, your balance effectively stays the same, and you’re now using up 75% of your available credit. As a general rule of thumb, it’s best to not go above 30% of your available credit, which in this particular example would be $4500 across all of the cards.
This can then lower your credit store unless the card in question has no balance. In that scenario, it seems acceptable to get rid of the card, unless it’s one that you’ve had for a long time as this will cause your credit score to drop (as per # 1).
It can affect mortgage applications and insurance premiums
Canceling a credit card and taking a hit on your credit score may not seen like a big deal if you don’t intend to take on further credit card or loan debts, but what about if you want to take out a mortgage or insurance policy in the future? Companies are commonly using credit scores to determine how high to set your repayments or insurance premiums, so a lower credit score can affect those. If in doubt, it’s probably better to wait until you’ve secured the mortgage or insurance policy before cancelling your card(s).
Interest can increase
If you want to cancel a particular card, make sure that you pay off the full balance before you put in the request. If credit card companies know that you plan to cancel the card while it still has a balance, they may decide to up your interest to make money from you while they still can.
It’s still on your credit report
Cancelling a card doesn’t ignore its existence as the information will remain on your credit report for as long as seven years. This includes late fees, charges etc.
Canceling too many cards at once is a bad idea
Canceling one credit card can have a negative impact on your credit score, but cancelling more than one can have a disastrous effect. Lenders will often look on this as a sign that you’re experiencing financial problems, even if the reality is that you just want to be able to manage your credit more effectively. If you want to cancel more than one card, it’s better to let six months or so pass between cancellations to be on the safe side.
The Verdict
If you’re concerned about affecting your credit score, you’re probably best to leave your credit cards as they are for the time being, especially with your oldest cards. However, for those of you who see available credit as a licence to carry on spending money you don’t really have, it might be a better idea to freeze your cards in a block of ice, pass them onto someone you trust for safekeeping or keep them locked away to take away the temptation. This gives you the opportunity to stop spending on the cards without having to actually cancel them and take a hit on your credit score.
If you do decide to go ahead and cancel your card(s), make sure that you’ve used all of your other available options first before you make the decision. To officially cancel a credit card, you need to contact the credit card company to officially terminate it. Cutting up your card won’t stop them from viewing you as a customer, albeit one who no longer receives bills from them.
Photo by wootam!
Related posts:
what about if it is a card that isnt yours but you are listed on? like a parent’s. it showed up on my credit record and skews my credit utilisation because she caries 15K balance and I have only one credit card of 5k that I pay in full…
That’s a tough one. How long have you had the card with 5k credit limit for?