If you’re worried about your current collection of credit cards, you’re not alone. The average American cardholder has four credit cards, says Experian. Nowadays, banks, credit unions, and even grocery stores are handing out credit cards like Halloween candy.
While credit cards offer unique cash-back rewards, annual statement credits, and interest-free financing, they’re designed to keep you spending money you don’t have. Credit cards can be a great financial asset if responsibly managed. Still, they have a bad reputation for having high-interest rates and leading to unmanageable debt. So, what are the implications of closing a credit card to your credit?
Consequences of Closing a Credit Card on Your Credit Score
Canceling credit cards with no rewards that suit your lifestyle might seem like a simple way to avoid related annual fees or gain control of your debts. The impacts of closing a credit card can remain on your report for years and plunge your scores considerably. Applying for a credit card already takes roughly five points from your credit score. Therefore, consider your credit score and personal financial goals before opening a new card. It’s not in your best interest to apply for more credit cards if you’re trying to improve your credit.
The two ways closing a card can affect your credit score involves the age of your credit and your credit usage rate. Generally, the average age of your opened card makes up 15% of your total score. If you have a credit card that’s been open for years, it’s better to keep it open because closing it affects your score negatively. Since your score is based on the age of all your accounts, the longer you have credit, the better it is for your overall credit score.
When it comes to your credit usage rate, your credit score is based on your Credit Utilization Ratio. This is how much of the available credit you use on your current card, and having a higher ratio will hurt your credit score. For instance, if your credit cards have a combined $10,000 in available credit on a $2,000 charge, your utilization ratio is 20%. Now, if you cancel a credit card with a $3,000 credit limit on the same $2,000 total charge, it increases your utilization score to 29%. You are effectively using about 10% of your available credit. Good scores should not go over the 30% threshold.
When Is It Ideal to Close a Credit Card?
There are instances where closing a credit card makes more economic sense than keeping it open:
High Annual Fees
For example, if your credit card has high annual fees, get rid of it even though you may lose the rewards that come with it. Before closing the card, find out if the card issuer has options for transferring your account to a different card with lesser or no fees. Alternatively, if you’ve accrued a good amount of reward points on your credit card, redeem them before closing the card.
It also makes sense to close a card if, like many people, you struggle with overspending. If you are always maxing out your credit limit without paying off the balance in full, you are better off closing the card. Unless you have a disposable income to exceed your basic expenses, charging up your credit limit increases your credit utilization ratio. When your credit-to-debt ratio increases, it causes a drop in your credit scores, which is frowned upon by credit bureaus. Maxed-out credit cards tell consumer reporting agencies you’re spending way beyond your means.
Credit cards are notorious for having high-interest rates mainly because they are unsecured loans and have no collateral to collect on should a borrower abscond payment. They’re also designed for large-scale consumption; that’s how they make money. High interest only hurts you if you carry a balance, so it’s advisable to close a card if you can’t keep up with the monthly payment. Otherwise, consider negotiating a lower interest rate with your issuer, that’s if you have a healthy payment record and good credit.
Credit Card Upgrades
Some people close their credit cards to upgrade to a better rewards card. If you’ve outgrown your current card and are looking for a better fit, you can ask your issuer for an upgrade instead of closing the card. An upgrade can simplify the approval process, plus you may dodge any inquiries about your credit report. In case you choose an upgrade instead of closing a card, ensure you’re aware of the applicable annual fee, as it may be higher than your current card.
How to Close Your Credit Card Without Affecting Your Credit Scores
A good credit score gives you greater access to better credit cards, lowers interest rates on your personal loans, and makes you an ideal candidate when renting a home. Here’s how to safely close a credit card:
- Pay off your credit balance to confirm you don’t owe the issuer money that you have to pay long after you’ve closed the account.
- Cancel any recurring payments for your bills.
- Check your program terms to see if you can redeem your rewards.
- Call your issuer to get the process of closing your card started. Cover your basis by writing to the issuer, so you have written proof that you’ve requested the account be closed.
- Check your credit report to ensure a zero balance reflects on your account, and then proceed to cut up your credit card.
If you’ve closed your cards but there’s incorrect information on your credit report, lodge a dispute with your issuer or the relevant consumer reporting agency.
Hire the Services of a Top-Rated Florida FCRA Attorney
You may hurt your credit score if closing the account causes significant changes to your credit utilization score. An FCRA attorney can perform various services aimed to help improve your credit score. If you believe your credit scores are damaged, our consumer protection lawyers can verify and dispute any negative items on your credit report.
Reach out to us at The Law Offices of Jibrael S. Hindi. Depending on your unique situation, we’ll take the necessary steps to correct any errors in your report to help repair your credit ratings. Know that our firm takes cases on a contingency basis whereby the firm does not get paid unless a recovery is obtained on your behalf. To arrange a free consultation, call at (954) 907-1136 or fill out our confidential contact form.