Think Twice Before Canceling Your Credit Card
Is canceling your credit card really a wise move? Before you close out your account and reach for the scissors, pause. Consider what this can do to your credit score and more.
Popular Belief on Canceling Credit Cards
You’ve paid off that nagging balance. Monthly payments and interest charges are over. Hallelujah. Or maybe you’ve absolutely had it with a certain credit card company. They’ve been a nightmare to work with, and you’re done!
You’ve been waiting to close your account for years. It’s time to hack up your card, right? Now, you finally can.
Whoa there, partner. Just because you can doesn’t mean you should.
The Truth About Canceling Your Credit Card
Did you know that maintaining your credit accounts with no balance is a good thing for your credit profile?
It’s actually a myth that canceling your credit card will immediately improve your credit score. In fact, the opposite is true. Canceling a card can drastically lower your score.
Even if you don’t plan to use your card in the near future, that line of credit can serve your credit score well. Keep reading to learn more about how this works.
It’s All About Utilization
Your utilization rate, that is. This rate is determined by adding up all of your credit card balances. That sum is then divided by the total of your credit card limits. You’ve maybe heard it referred to as your “balance-to-limit ratio” or “debt-to-credit ratio.”
Tip: At WJA, we tell our clients to aim for a lower utilization rate of 30 percent or less. Your utilization rate accounts for nearly a third of your overall credit score. Things like payment history and the length/age of your accounts are factors as well.
You never want a high utilization rate. This causes your credit score to decrease. Think about it: If you’re using nearly all of your credit, lenders will see you as a risk. So, keeping your limits high and your balances low can certainly help you improve your credit score.
One way to keep those limits high is to keep your credit card open. That open card with no balance will likely give you a credit score boost. Lenders can observe all your available credit and note that you’re responsible and managing your finances well.
Other Reasons to Keep Credit Cards Open
Here are a few other reasons to keep lines of credit open, thus keeping your limits available and high. So before closing your card and getting scissor-happy, remember what you’ve learned so far. Then review the following:
• Older Lines of Credit
When bureaus and lenders check out your credit score, they’re examining the length of your accounts. Perhaps you’ve been building up good standing over the years. Do you want to cancel that? Make the wisest financial decision for yourself.
• Variety of Accounts
It’s common for people to have a mortgage, auto loans, and credit cards. This diversity in your credit portfolio matters. A good mix of different types of loans can be beneficial. If you cancel your cards, your credit score could suffer.
• Access to Card Benefits
Weigh the positives and negatives of annual fees on credit cards. Don’t forget about great rewards, cash back, travel protection, discounts, and any other beloved extra features. If you cancel, you’ll lose the potential to save or even make money with these benefits.
• Backup Line of Credit
Your finances can take a hit with no warning. Automobiles break down, or family members require hospitalization. Your job may not be a sure bet either. If you are disciplined enough, having a rainy-day card for life’s emergencies could give you peace of mind.
Consider Before You Cancel
By all means, if you can’t control spending or if annual fees are costing you, cancel your card. It’s definitely possible to cause damage rather than to see improvement. Every individual has to make decisions based on their particular situation and budget.
But understand that canceling your credit card will instantly affect your credit score. If you have good or average credit, you can expect to see a rather dramatic decrease.
If you can, put forth the effort to maintain that available credit line. At the very least, think twice before closing your credit accounts. High limits and low utilization are ways to keep your buying power intact.