If you have several credit cards and are trying to improve your credit score, it might sound like a good idea to cancel the cards you no longer use. However, in many cases, this action can hurt your credit score rather than help it. That’s why it’s important to ask yourself a few questions before you decide whether to close one or more credit cards. Consider the following details before you make a decision.
1. How Will This Affect Your Credit Card Utilization Rate?
Your credit card utilization is a big part of your credit score, accounting for about 30 percent of the overall score on your report. In general, you should keep your credit card utilization under 30 percent if you want the highest score you can get. This should be easy if you don’t keep a balance on your credit cards, in which case closing one or more shouldn’t affect your credit score.
But if you do owe money on one or more cards, be careful about closing those accounts, because this action will increase your credit card utilization rate. For instance, if you have two cards — each with a limit of $1000 and a balance of $200 — your utilization rate is 20 percent, which puts you on the path to having a great credit score. If you choose to close one card, your available credit on that card becomes zero, taking your utilization rate from 20 percent to 40 percent.
The best way to avoid this, aside from keeping both credit cards open, is to pay off the balance of the card you want to close. That way, your utilization rate will remain the same even after you close one account. You can also ask for an increase in your credit limit on the card you want to keep open, assuming you won’t be tempted to use the card more and increase that balance. So if you cancel a card with a $500 limit, increasing your other card’s limit by $500 can likely keep the closure from affecting your credit score.
2. Is This Your Oldest Credit Card?
If you want a good credit score, you need to have a long history on your credit report. After all, the length of your credit history makes up around 15 percent of your credit score. So if you are thinking about canceling your first credit card that you got 10 years ago, this action might decrease your score. This is especially the case if all of your other accounts are only five years old, since your credit history will suddenly go from 10 years long to just five years long. This is why you should refrain from canceling your oldest credit cards.
On the other hand, if you have several other accounts that are about the same age as the credit card you are looking to cancel, you probably won’t see much of a drop in your score at all. This is because your credit history will still be the same age as before.
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3. What Are the Downsides of Keeping Your Credit Card Account Open?
As you can see from the other two questions, canceling credit cards is not always the best option, since it can end up reducing your credit score. However, in some situations, closing a credit card account is the right choice, even if it will reduce your credit score for a while. For example, if you have a credit card you rarely or never use, and it has an expensive annual fee, closing it might be in your best interest. You shouldn’t feel pressured to keep paying the fee every year just in case closing the card drops your score.
In addition, if you feel tempted to use your credit cards just because you have the available credit, you should probably close those accounts. After all, increasing your debt with impulsive spending on your credit cards will quickly raise your utilization rate, which will reduce your score anyway. And of course, if one of your credit cards has a high interest rate, you probably shouldn’t be using it, which means closing it is a good idea. Consider transferring any balance to a card with a lower interest rate before closing the card. If you don’t have that option, simply close it and continue making payments on the balance every month.
If it turns out that closing one or more credit cards is the best option, you have to do more than just cut up the cards. To close the account, you need to call the credit card company and request that your account be closed. You can also follow up by mailing a letter confirming that you closed your account. Be sure to monitor your credit report after this to make sure the account shows up as closed. It might take about a month for your credit report to be updated, but once it is, it may be time to find out your new credit score to learn exactly how the closure affected it in the end.