Are you thinking about closing a credit card? It’s a decision that can have a significant impact on your financial health, and there are several factors to consider before taking the plunge. In this article, we’ll break down step by step exactly how to close a credit card the right way and discuss when it makes sense to do so. We’ll also explore alternatives to canceling that may be more beneficial for your financial situation.
The Impact of Closing a Credit Card on Your Credit Score
One of the most important things to consider before closing a credit card is how it will affect your credit score. There’s an ongoing debate about whether closing a credit card will harm or boost your credit score, and opinions on this matter vary. Let’s dive into what actually happens when you close a credit card.
Credit cards are revolving lines of credit, which means you can use them whenever you want, unlike a fixed loan where you receive a lump sum and must repay a fixed amount monthly. Credit cards provide flexibility in managing your expenses. When you close a credit card, it can potentially impact your credit score, and here’s how:
Imagine you have three credit cards, each with a $1,000 credit limit and a $300 balance. This means you have a total credit limit of $3,000 and owe $900 across all your accounts, resulting in a 30% credit utilization rate.
If you were to close one of these accounts while maintaining the same balances, your total credit limit would decrease to $2,000, but your debt remains at $900. This would increase your credit utilization rate to 45%. Credit utilization accounts for 30% of your credit score, so this increase could negatively affect your score.
However, when closing an account, you would typically need to pay off the balance within 30 days. If you do this and end up with a smaller credit limit, your credit utilization rate should remain the same. This is a crucial consideration when contemplating closing an account, as it reduces your available credit, making it easier to accumulate higher utilization rates.
Length of Credit History: Does Closing an Account Shorten It?
A common misconception is that closing a credit card shortens your credit history. This is not entirely true, as credit scores factor in both open and closed accounts. Your credit history contributes to 15% of your credit score.
When evaluating your credit history, credit bureaus consider the age of your oldest and newest accounts, as well as the average age of all your accounts, whether they are open or closed. So, even if you close an account in good standing, it continues to positively influence your credit score for up to 10 years.
However, it’s essential to note that closing your oldest account, such as your first credit card, could have a more significant impact on your credit history’s average age. Keeping such accounts open can further improve your credit score over time.
Benefits of Keeping Credit Cards Open
While the decision to close a credit card should not be taken lightly, there are several benefits to keeping credit cards open, even if you don’t use them regularly. Here are some reasons to consider:
- Access to More Credit: Keeping multiple credit cards open provides you with access to more credit, making it easier to maintain a lower credit utilization rate.
- Length of Credit History: Open accounts, even if not actively used, continue to contribute positively to your credit history’s average age.
- Potential for Repeat Signup Bonuses: Some credit card issuers allow you to receive signup bonuses again for the same card after a few years, which can be valuable for earning rewards.
- Flexibility: Multiple credit cards offer flexibility in managing your finances and provide backup options for emergencies.
Alternatives to Closing a Credit Card
Before closing a credit card, consider these alternatives:
- Request a Fee Waiver: If the primary reason for closing a card is the annual fee, contact the credit card issuer to inquire about waiving the fee or offering compensation in the form of points.
- Downgrade the Card: Many credit card companies allow you to downgrade cards with annual fees to a lower-tier card without a fee. This helps you maintain your account history.
- Transfer Credit Limit: If you have multiple cards with the same issuer, inquire about transferring the credit limit from the card you plan to close to another card with the same company.
- Use Rewards Points: If your card has accumulated rewards points or cash back, consider redeeming them before closing the account to avoid losing them.
- Notify Authorized Users: If you have authorized users on your account, inform them of your intention to close the card, as it may affect their credit scores.
Making the Decision
whether to close a credit card is a personal decision that should be made after careful consideration. Evaluate your financial situation, credit utilization, and the benefits of keeping the card open. If you decide to close the card, ensure you can pay off any outstanding balances within 30 days. Remember, maintaining a healthy credit profile is essential for your financial well-being.
Before closing a credit card, explore alternative options such as fee waivers, downgrades, or transferring credit limits. By making an informed decision, you can protect your credit score and financial stability while effectively managing your credit cards.
Frequently Asked Questions (FAQs)
Should I close my credit card if I’m not using it?
Closing a credit card that you’re not using is generally not recommended. Keeping the card open can have several benefits, including maintaining a longer credit history and a lower credit utilization rate. However, if the card has an annual fee that you’re not willing to pay, consider alternatives such as downgrading to a no-fee version of the card or negotiating with the issuer for a fee waiver.
How does closing a credit card affect my credit score?
Closing a credit card can potentially have both positive and negative effects on your credit score. It may negatively impact your credit utilization rate, which accounts for 30% of your credit score if it reduces your available credit. However, it may positively affect your credit history’s average age if the closed account was in good standing. The overall impact on your credit score depends on your unique financial situation.
Can I close a credit card with an outstanding balance?
You can close a credit card with an outstanding balance, but it’s advisable to pay off the balance first. Closing a card with an unpaid balance may negatively impact your credit score and result in additional fees and interest charges. Be sure to settle any outstanding balances before requesting the closure of the card.
How can I close a credit card?
To close a credit card, contact the credit card issuer’s customer service department. You can usually find the contact number on the back of your credit card. Inform them of your intention to close the card and follow their instructions. Ensure that you can pay off any remaining balance within 30 days if applicable.
Will closing a credit card affect my credit history?
Closing a credit card can affect your credit history, but not in the way you might think. Closed accounts in good standing continue to contribute positively to your credit history for up to 10 years. However, closing your oldest account may shorten your average credit history age, which could have a slight negative impact on your credit score.
What alternatives should I consider before closing a credit card?
Before closing a credit card, consider these alternatives:
- Fee Waiver Request: Contact the issuer to inquire about waiving annual fees or offering compensation in the form of points.
- Downgrade the Card: Many issuers allow you to downgrade cards with annual fees to no-fee versions, preserving your account history.
- Transfer Credit Limit: If you have multiple cards with the same issuer, ask if you can transfer the credit limit from the card you want to close to another card.
- Use Rewards Points: Redeem any rewards points or cash back you’ve earned on the card before closing it.
- Notify Authorized Users: If you have authorized users on the card, inform them of your intention to close it, as it may impact their credit scores.
How can I maintain a healthy credit profile?
Maintaining a healthy credit profile involves several key practices:
- Pay your bills on time to avoid late payments.
- Keep your credit utilization low by using only a portion of your available credit.
- Avoid opening too many new credit accounts in a short period.
- Monitor your credit report regularly for errors and inaccuracies.
- Keep older credit accounts open to maintain a longer credit history.
- Use credit responsibly and only borrow what you can comfortably repay.
Can closing a credit card improve my credit score?
Closing a credit card may improve your credit score in certain situations, such as when it reduces your credit utilization rate or if you have multiple credit cards with high annual fees. However, the impact on your credit score can vary depending on your specific circumstances. It’s essential to consider the potential consequences before making a decision.
Should I close a credit card if it has an annual fee?
Closing a credit card with an annual fee should be considered carefully. Before closing it, explore options such as fee waivers, downgrades, or transferring credit limits. If you find that the card’s benefits no longer justify the fee and these alternatives are not viable, closing it may be a reasonable choice.
Can I reopen a closed credit card account?
Reopening a closed credit card account depends on the credit card issuer’s policies. Some issuers may allow you to reopen a closed account within a certain timeframe, while others may not. Contact the issuer’s customer service to inquire about the possibility of reopening a closed account if you change your mind.