Closing your credit card accounts usually dings your credit in two ways -- by changing your length of credit history and affecting your credit utilization rate -- two factors that help determine your credit score. Show
It changes the length of your credit historyYour length of credit history makes up 15% of your credit score, and it includes the age of your oldest card, your newest card and the average age of all your cards. A longer credit history can boost your score. Closing your oldest card could shorten your average and bump down your score. But the impact won't happen right away. Typically, a closed credit card in good standing will stay on your credit file for 10 years, so it could be a while until closing an older card account dings your score. It can raise your credit utilization ratioYour credit utilization can be found by dividing the balance on your cards against the total credit limit on all your cards. For instance, let's say you're carrying a balance of $500 across all cards, and the total limit on all your cards is $5,000. Your credit utilization rate would be 10% ($500 divided by $5,000 equals 0.1 or 10%). If you close a card with a $1,500 credit limit and $0 balance, your credit utilization rate would rise to 14% ($500 divided by $3,500). The higher your credit utilization, the riskier you seem to creditors and lenders. That's because it might be a warning signal that you're in financial hot water or are having problems keeping up with your bills, so you're resorting to plastic. So where should your credit utilization hover? The rule of thumb is to aim to keep it under 30%. Credit utilization makes up 30% of your credit score, so it's important to keep your utilization low if you want to maintain a solid score. When closing a credit card makes senseSo is it bad to close a credit card? Not necessarily. While it could put a dent in your score, there are a few instances when it might make sense to do so:
If you can resist temptation and avoid touching your credit card entirely, you could keep your card open while focusing on other debt, or making slow headway paying off outstanding balances. How to close a credit card the right wayIf you do need to cancel a credit card, there's a process you should follow. 1. Pay off your balanceTo cancel your card, your balance must be paid in full. Otherwise, you'll need to keep it open until the balance is zero. 2. Redeem any existing rewardsAny rewards points you earned while using your card will often vanish once you close a card. Depending on the card, you might be able to transfer your points to another card or cash-back rewards program. So enjoy those reward points before you cancel. 3. Call the credit card companyTo officially cancel, call the number on the bank of your card and talk to someone from the credit card company or bank that issued that card. The customer service representative will most likely try to entice you with attractive offers to keep your card open. Stay strong, and remember your reasons for closing your account. 4. For extra protection, send a letter of cancellationWhile this isn't required, send a certified letter to the credit card issuer that you have canceled your card. When you're on the phone with the customer service rep, ask them for the best address to send such a letter. And ask the issuer to confirm your account has been paid in full. 5. Check your credit reportBefore you close your card, check your credit report and check for any errors. You can order a free report every 12 months from each of the three credit bureaus -- Equifax, Experian and TransUnion -- from AnnualCreditReport.com. 6. Safely dispose of your cardOnce you've properly closed your account, it's safe to get rid of the card. Shred your card and make sure the sequence of numbers is unrecognizable. Alternatives to considerIf you don't want to cancel your credit card and hurt your credit score, here are a few other options to mull over:
Is canceling your credit card wise?It could be a smart idea to cancel a credit card when it's costing you too much money or hurting your credit score in other ways. However, as canceling a credit card typically hurts your credit, if you are going to close your card, you can do it in a way that minimizes the damage to your credit file. Weighing the pros and cons can help you make the best choice for your financial situation. Is it better to cancel unused credit cards or keep them?In general, it's best to keep unused credit cards open so that you benefit from a longer average credit history and a larger amount of available credit. Credit scoring models reward you for having long-standing credit accounts, and for using only a small portion of your credit limit.
How do I get rid of a credit card without hurting my credit?Consider the Timing and Impact on Your Credit. When you close a credit card, your credit score may be affected. ... . Pay Down the Balance. ... . Remember to Redeem Any Rewards. ... . Contact Your Bank to Cancel. ... . Don't Accept Their Offers. ... . Write a Letter for Your Records. ... . Check Your Credit Report to Ensure the Account Is Closed.. |