Do you have an old credit card that you don’t use and want to cancel it to prevent any future temptations? Good idea – but doing so can lower your credit score. Before you make your decision let’s look at how closing that card may affect you.
15% of your credit score is made up of how long you have previously held credit for as this indicates that you have a solid track record of handling repayments. As a result, dumping a card that you’ve had for years can lower your average credit length ending in your credit score taking a hit.
I’ve come across many people who think that reducing the number of credit cards they hold will automatically improve their credit score. This is false because lowering your available credit by closing an account results in a negative shift to your credit-utilization ratio. For example, if you have three cards with limits of $10,000 each, your total available credit is $30,000. If your balance across these cards is $15,000, you’re using up 50% of your available credit. If you close one of the accounts, you lose $10,000 of your available credit, which drops it to $20,000. As a result, you now have $20,000 in total available credit with $15,000 charged – 75% of your available credit. Your credit score will start decreasing – if you do not pay down a large portion of the balance immediately – due to the new high credit-utilization ratio.
When you are ready to cancel a card, make sure to pay off the full balance before you put in the request. Credit card companies have a nasty habit of pumping interest rates when they know you want to leave as an attempt to milk you even more while they still can.
Closing a card doesn’t eliminate its history on your credit report for as long as seven years. Yes – late fees, charges, delinquencies, etc. still stay on.
Maybe you recently did some spring cleaning with your finances, or maybe you just decided to finally cut down on all of the cards you signed up for back when you were in college. Whatever the case, you’re planning on calling a few of your creditors and closing multiple accounts at once. The biggest problem with a “multi-account shutdown” is that lenders will often look on this as a sign that you’re experiencing financial problems, thus commonly resulting in a negative or disastrous effect on your credit score. If you want to cancel more than one card, it’s better to let approximately six months pass between cancellations to be on the safe side. Remember – you’re destroying your credit length history and your credit-utilization ratio at the same time by canceling more than one card at once.
Closing credit cards can not only cost you your credit score, but also your money. You always have to keep in mind that your credit score is what determines your interest rates on your mortgage, auto loan, insurance policy, etc. If you feel that you just can’t manage your temptation to spend you can either cut up the cards, give them to someone you trust for safekeeping, or keep them locked away.
Lastly, for those who still feel they need to close their account(s) – you can do so by contacting the credit card company to officially terminate it. Just remember to pay off the full balance beforehand to prevent your interest rate from skyrocketing.
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