You Want To Upgrade To A Rewards Card
If you’re planning to close an account because you want to upgrade to a different card, ask the issuer to transfer your account to the new card instead. Balance transfers don’t usually incur direct changes to your credit score, but opening a new card may. This could be an increase or decrease in score depending on the circumstance and other factors in your credit history.
Does Closing A Credit Card Hurt My Credit Score
- Does Closing a Credit Card Hurt My Credit Score?
Youve paid your remaining credit card balance. Now its time for the ceremonial snipping that will keep you from ever using the card again. Its a satisfying gesture, especially if youve found it hard to use a credit card responsibly. But closing a credit card may impact your credit score. Your credit score is based on several factors. And closing a credit card account can have an impact so its important weigh the pros and cons first.
Thinking About Closing Your Credit Card Here Is Everything You Need To Know About The Right Way To Do It
A credit card can be a useful tool for someone who wants to spend freely, earn rewards, build credit history and a host of other benefits. But at some time, having too many credit cards can make it difficult to keep track of payments due, due dates and annual maintenance fees.
Does closing an old credit card impact your credit health? Well, it depends on your financial situation, but like most things in life, closing a credit card comes with its pros and cons. While closing a credit card can hurt your credit utilization ratio rate and the average age of your accounts, however in some cases, cancelling a card might make sense.
For example, abandoning a card could be a good idea if youre trying to maintain your spending to a minimum however if this is the only credit card you have, think twice as a credit card allows flexibility especially during travel and emergencies. Before you rush off to cancel your credit card, heres what you need to know:
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Does Closing A Credit Card Hurt Your Credit Score
A bunch of things go into the calculation of your credit score, but the one most relevant to this issue is called your credit utilization ratio, or CUR. Thats the percentage of available credit that youre using.
If you have three cards with $5,000 credit limits each, you have $15,000 in total available credit. Now say you have $3,000 in credit card debt, spread across two of those cards. Your total CUR is $3,000 out of $15,000, or 20%. When you close your unused credit card, youre now using $3,000 out of the $10,000 in credit thats left available. Your CUR suddenly jumps from 20% to 30%. That doesnt look good to credit bureaus like Equifax, Experian, or TransUnion.
Dinging you for closing a credit card account might seem unfair, but credit card companies and bureaus are just following the statistics.
Our analysis of millions of credit records at different points in time has consistently found that those with lower credit utilizations are less likely to default on their credit obligations in the future, than those with higher utilizations, says Tommy Lee, Principal Scientist at FICO, one of the leading credit scoring services in the U.S.
The negative impact on your credit score when you are closing a card is usually modest, says Lee. However, the severity depends on a few factors. Those include the size of your debt, the limit of the credit card you are canceling, and the limits of the remaining or new cards.
Pay Off Your Credit Card
Paying off your remaining balance is a crucial first step in cancelling a credit card. Some think that cancelling a card will make itâs associated debt go away. While this is a beautiful dream, the reality is that the money you owe follows you everywhere.
Your remaining balance will continue to accumulate interest, so it’s best to face it head-on. Trying to pay off a balance on a closed credit card is much more stressful, as your bank may have transferred your debt to a collection agency.
If youâre unable to get your balance to zero, you may be able to transfer it to a balance transfer card for a small fee . These cards have very low promotional interest rates , allowing you to pay off your debt faster, and some even offer to waive or rebate their fee. Regardless, paying a small balance transfer fee is still preferable to carrying on debt month to month, so itâs worth looking into.
After paying off your entire balance, wait a few weeks before cancelling your card to catch any pending payments that may have shown up late. In addition, make sure to contact your card issuer to ensure your card still has no balance before closing it down.
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The Average Age Of Your Accounts Will Decrease
The longer you’ve had credit, the better it is for your credit score. Your score is based on the average age of all your accounts, so closing the one that’s been open the longest could lower your score the most. Closing a new account will have less of an impact. To keep your credit score in good standing, it’s important to remember to stick with a low balance that can easily be paid off before your due date.
Cancelling Unused Credit Cards
It makes sense that if you arent using a credit card, or dont need it, that you would cancel it. This may seem like the logical choice. Why keep a credit card open if you arent planning to use it? But as mentioned above, there is good reason to leave it open.
That being said, if you dont think that youll be able to resist the urge to use it, then it may still be a good idea to cancel your credit card. Cancelling a credit card may be the right choice for you, at least until you are able to learn better budgeting and spending habits.
At CreditNinja, we recommend keeping these cards open. Anything you can do to raise your credit score is usually a wise decision. But what about if you have no credit? Learn more about that here and other topics like spending, budgeting, and credit cards in the CreditNinja Dojo!
References:
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How To Close A Credit Card Safely
If you’ve decided that it makes sense for you to cancel your credit card account, here are the steps to take so you have no issues:
Check Your Credit Report Shows The Account As Closed
Once youve sensibly followed steps 1 to 6 above, to make absolutely certain that your credit card account is closed, you should order a free copy of your credit report several weeks later to check your credit card account is marked as closed. If it isnt, consider using the free resolver.co.uk service to complain to your old card provider that despite you requesting an account closure, they still havent proceeded to close your account. Using this service should make them jump to attention and get the job done!
Note: As there are three main credit reference agencies in the UK and your credit card could be active and shown on one or more credit files, you should order a multi-agency credit report so that you can check all three at once.
You can get a free, multi-agency report with checkmyfile.com by tapping the button below. Sign up now for a 30-day free trial and cancel anytime :
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Terminates Access To Benefits
If youre a frequent traveler or shopper, the miles and cash back options offered by some cards may be very attractive. While these benefits are usually not a good reason alone to keep a card around, you may want to factor in the value you place on those rewards when considering closing a card.
While it may sometimes be appealing to cut up your cards and cancel your accounts, you should weigh how this may impact your credit score before doing so. If you have a card youre not using, maintain other types of credit, have a low utilization ratio, and are not planning on applying for any loans soon, it may be a good idea to cancel your card. Understanding the factors that affect your credit score may help you make smarter financial decisions and gain greater control of your finances.
Hold On To Your Single Days
If youre married, dont give up your identity entirely. Simply being an authorized user on your sweethearts credit cards wont help you establish credit or keep your reputation intact. You must keep at least one line of credit from your single days open and active, and in your name only. If you dont occasionally use the card your file will go dormant and become un-scoreable.
In addition to using the nuts and bolts of your credit card program, other factors may play a role in reviewing your lending relationships. Customer service is a biggie for some, and its usually not an issue until something goes wrong.
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How Canceling A Credit Card Impacts Your Fico Score
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Here at TPG we spend an incredible amount of time talking about which credit cards you should open, which cards pair well together and even how to build an overarching credit card strategy. An equally important topic that rarely gets as much attention is when and why you should consider closing your credit cards.
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If you have credit cards you no longer find valuable, especially if it charges an annual fee, your first instinct may be to cancel that card. Your strategy for closing cards deserves as much attention as your strategy for opening them because closing accounts can potentially affect your credit score.
Check Credit Report To Ensure
It may take 4-6 weeks for changes to appear on your credit report. But be sure to check your credit report with any of RBI licensed credit bureaus to ensure that the credit card is completely closed and is reported closed. It might not affect the credit score, but it is better to have the status of your credit account reflect on your report accurately to avoid any future discrepancies. Contact your credit card lender or file a dispute with the credit bureau if your credit card account isnt reported as closed.
Closing a credit card is not a risky step to take, it just must be taken with caution to avoid a negative effect on your credibility.
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When Canceling A Credit Card Makes Sense
There are a few situations in which it may make sense to cancel a credit card. For example, if:
- The card has a high annual fee and the benefits aren’t worth it to you
- The interest rate on the card is high and you need to carry a balance
- You are struggling to manage your debt load and are having trouble resisting the temptation of living beyond your means with the card
- You want to get rid of a bare-bones card, like a student card or secured card, in exchange for a regular or rewards card
Why You Should Close A Credit Card
You’re overspending: If having access to a credit card tempts you to spend more than you normally would — particularly if it’s landing you in debt — you should consider closing your credit card. Keep in mind, though, that regular credit card usage is key to building and maintaining good credit. Consider leaving your credit card at home and using it to pay one or two small bills each month.
Your interest rate is increasing: If you’re currently paying off a card balance, and you get a notice that your interest rate is increasing, the Credit Card Act of 2009 gives you the right to opt out of that increase — as long as it’s not due to a late payment. Doing so will likely result in the closure of your account, but you’ll be able to continue paying off your balance at the current rate.
It charges an annual fee, and the benefits don’t make up for it: If your credit card charges an annual fee, make sure you’re earning enough rewards and benefits to make up for that fee. If not, you’ll want to close the card, or downgrade to a no-annual-fee version if possible.
It doesn’t match your spending habits: The best credit cards come with generous rewards programs and benefits that line up with your spending habits and maximize your savings. If yours doesn’t, you might want to consider getting one that does. However, as long as it doesn’t charge an annual fee, leaving it open doesn’t hurt — and might even help — your score.
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Dos And Donts Of Closing A Credit Card
There are good reasons for closing a credit card. Whether the temptation of using credit is leading you to constantly overspend and rack up interest, you have so many cards that youâre losing track and missing payments, or you want to get rid of a card with a low limit and higher than normal interest rates, cancelling can be the right move.
If you plan on cancelling one of your credit cards, consider the following doâs and donâts to minimize the impact on your credit score.
Can You Downgrade To A No
If youre closing a credit card because youre not getting enough value to offset the annual fee, consider asking the card issuer to downgrade your account. By downgrading your card to a different product such as from the Capital One Venture Rewards Credit Card down to the Capital One VentureOne Rewards Credit Card with no annual fee you might protect your credit. But know youll be taking a hit when it comes to card perks.
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Check Your Credit Report Again
Once the card is closed, its always a good idea to recheck your credit report. By law, you are entitled to a full credit report from the three major credit bureaus Experian, Equifax, and TransUnion once a year for free. To get your complete reports, head on over to the annual credit report site and click the Request your free credit reports button. If youve already received your free yearly report, be prepared to pay up to $13 per report if you decide to check your credit report after closing down a credit card account.
What Is Credit Utilization
You can calculate your credit utilization ratio using the following formula:
Maintaining a credit utilization ratio of 0% to 10% is best if you want to maximize your credit scores. But unless youre planning to apply for financing in the near future, a utilization rate of less than 30% may be sufficient.
Either way, youll want to pay your full statement balance by the due date every month to avoid expensive and to protect your credit score from late payments. If youre trying to keep the credit utilization on your credit report as low as possible, then the best time to pay your credit card is prior to the statement closing date.
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Your Credit Utilization Increases
If you close an account, your credit utilization ratio â how much available credit you have versus how much you are using â will increase.
If you donât know your credit utilization ratio, itâs found by dividing your total by your credit limit .
For example, letâs say you have a credit card with a $30,000 credit line, and you have a balance of $15,000. Thatâs a 50% credit utilization ratio.
A general rule is that lenders like ratios of less than 30%, and those who have low credit utilization ratios, signifying they are low risk by not carrying a high balance, typically have high credit scores.