Are you asking yourself, “How does canceling a credit card affect your credit score?”
Are you considering snipping your credit card in half? Perhaps you want to avoid excessive spending, or you have a card tacked with annual fees or a high interest rate. Well, before you reach for the scissors, here’s what you need to know about closing a card and its potential impact on your credit score.
How Does Canceling A Credit Card Affect Your Credit Score?
Reasons why you might close a credit card
The decision to cancel a credit card may stem from what’s unnecessarily costing you money (cards that have high interest rates or annual fees). Even though you can ask for a lower interest rate by getting in touch with the card issuer, they won’t always respond in your favor. Credit cards that charge annual fees are ripe for cancellation if the issuing bank won’t waive the fee.
Another good time to close a credit account is when you’re opening up a new credit card account. After an excellent balance transfer deal or a nice sign-up bonus for a new rewards credit card, then consider closing an old card.
Before you cancel a credit card: What you should know
How does canceling a credit card affect your credit score? Well, there are some things to consider before closing any credit account. The mere act of canceling a credit card does not mean its payment info falls off your credit report immediately.
For open accounts, positive credit data can potentially stay on the credit report indefinitely. Closed accounts with balances of zero and no negative information usually stick to credit history for 10 years from the date they’re closed. Thus, positive information can remain on there longer than negative information.
That is because blemishes on your credit report do indeed come with an expiration date. Negative information, including late payments and foreclosures, have to come off your credit report after seven years.
Furthermore, potential lenders factor in the credit amount still in use when a card and its credit limit are both canceled. Credit bureaus and lenders have an interest in the credit utilization ratio, which compares the amount of credit being used to the total credit the borrower has available.
Know how it will affect your credit. Unfortunately, closing a card will never help your score, and only has the ability to hurt it. Take a look at some aspects of your credit it could impact:
- Average age of accounts. Canceling a credit card will not impact the average age of your accounts immediately, but if you cancel a card that is quite a bit older than your other credit cards, it may lower your average age when it finally falls off your credit history. Subsequently, that would lower your score. Keep your oldest card open, particularly if it holds a positive payment history.
- Credit utilization ratio. When you cancel a credit card, you lessen your available credit. Unless you cut back on spending, this will negatively impact your credit utilization ratio. Thus, even if you no longer want a certain credit card, it might be worth it to keep the card open – simply to lower your ratio.
- Number/variety of credit accounts. Once again, this will not affect your credit score for awhile. However, many credit scoring models factor in the number of accounts and variety of types of credit, so closing your only credit card could hurt you.
Try to bargain with your credit card issuer. In many cases, it costs lenders more to find new customers than keep old ones on board. So if you wish to close a credit card just because it holds a high APR or an annual fee, try to first request a lower interest rate or ask the credit issuer to waive the fees (as mentioned earlier).
Consider canceling cards that are costing you money. Again, if your card has an enormously high interest rate or other fees, and your provider will not compromise, you may want to consider closing the card – especially if you do not use it.
Remember to redeem any credit card rewards. It’s often common to lose some rewards when a card of that type is closed, and this might be inevitable. However, with proper planning, you can perhaps minimize the loss. Check your card issuer’s rewards procedures. You might be able to pull accumulated miles or points as a statement credit, if you cannot successfully apply them to travel or merchandise. Cash-back cards typically come with the simplest redemption features. However, most of them require rewards to reach certain thresholds—usually $20 or $25—before you’re able to redeem. Know the rules for redemption so you can plan out how to best capture accumulated rewards before you snip up the credit card.
Monitor your credit. The credit bureaus do not always have your credit history completely accurate, and so you must watch your credit and dispute errors. Don’t forget: While your closed accounts will remain on your credit report for 7+ years, they should be marked as “closed.”
Know what to do beyond cutting your card in half with scissors. Canceling a credit card is a major decision, so make sure you fully commit to it. Even if you close the card via phone or online, follow up and make sure it is indeed canceled. Send a certified letter to the customer service department and request a confirmation letter. It can take a bit of time for your lender to process it, so sit tight! Once you are 100% certain it is a closed account, then you can finally slice up your card.
Close all of your credit card accounts. How does canceling a credit card affect your credit score? Aside from potentially hurting your score down the road, closing all your credit cards may put you in a sticky situation if you ever need emergency credit.
Forget to use your already open credit accounts. It costs money for lenders to report to credit bureaus. Thus, if you fail to use your cards regularly, the company might stop reporting them altogether. This may impact your score. So if you are keeping credit accounts open just so you don’t have to close them, try charging one minor, monthly, recurring payment on your cards (and paying them off each month in full) to ensure they remain active. For instance, this could be a tank of gas each month charged on that card.
Close credit cards with favorable terms. No credit card is perfect. But if your card holds a low interest rate, no annual fee and other positive perks, it might be worth keeping it open just in case you need it later on. If you close the card, damage your score and end up needing to apply for more credit down the road, you might not get as great a card as the one you previously closed.
Close cards before financing a big purchase. When applying for a mortgage or car loan, your score must be as high as possible so that you can reap the lowest interest rates. Plan ahead, and don’t let a last-minute impulse buy result in you paying thousands extra in interest over the lifespan of your loan.
All in all, the choice to close a credit account is yours. However, keep these tips in mind and take a thorough look at your personal finances before making an informed final decision. Still need answers to “How does canceling a credit card affect your credit score?” Contact us!
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