If you’re the same as most Americans, you have around four credit cards in your wallet. Closing cards you don’t need is not necessarily a bad thing, but your decision can affect your credit score.
You also need to know when it makes sense to do it anyway, and how to minimize the impact on your credit score.
Closing your credit card can damage your credit
Closing your credit card account can have a negative impact on your credit, but how painful your score is depends on your credit history. Factors like the number of other accounts open, the amount of time you have an account and their balance, all can play a role.
Closing your credit card may increase your credit usage rate
Your credit utilization rate – the percentage of available revolving credits you are using – is one of the most important factors in the credit scoring model. It shows how well you manage your debt. A general rule of thumb is to keep your credit usage below 30%.
Closing your credit card may increase your credit usage as the amount of credit available decreases. For example, imagine you have three credit cards with the following balance:
- Card 1: $6,000 Balance / $10,000 Credit Limit
- Card 2: $1,000 Balance / $3,000 Credit Limit
- Card 3: $0 Balance/$12,000 Credit Limit
I borrowed $7,000 out of the $25,000 available credits. In other words, the usage rate is 28%. If you cancel because you are not using Card 3, your available credits will drop to $13,000, leaving you with a 54% utilization rate.
Close the oldest card to reduce the length of your credit history
The length of your credit history is another factor that affects your credit score. It is determined by the age of your oldest account and the average age of your account. A long history of responsible credit use can improve your score.
Closing the oldest credit card reduces the length of your credit history. However, it does not immediately affect your credit score. A closed account can remain on your credit report for ten years.
Closing your only credit card can affect your credit mix
A credit mix refers to the different types of credit accounts you have. This includes revolving accounts such as credit cards and installment accounts such as mortgages and car loans.
Having different account types can help you with your credit score by demonstrating your ability to manage multiple types of debt responsibly.
Close your credit card can affect your credit mix, especially if your credit card account is your only credit card account. Credit mixes are a relatively minor factor in the credit scoring model, so the impact on credit may not be significant.
A good idea when closing your credit card
Despite the potential drawbacks of canceling your credit card, it may be worth closing your account in some circumstances. You may decide that closing the card makes sense in the following situations:
- You have consolidated your debts. After opening your balance transfer card, you can close your old account to avoid acquiring new debts.
- There are cards with high annual fees. Some premium credit cards have high annual fees that make no sense if you rarely use the card or its perks.
- There are high interest rate cards. If you need to fund a large purchase, we recommend switching to a low interest rate card.
- You have a co-credit card with your ex. Generally, the only way to remove a name from a co-credit card is to close your account.
- I have retail credit cards from stores that I no longer visit. Retail credit cards that can only be used by certain retailers are not very useful if you don’t shop there.
- You must close your account to get a loan. Lenders may instruct applicants to close their credit cards to meet mortgage eligibility criteria.
- You will seduce not to use too much cards: Research suggests that consumers spend more when using their credit cards compared to cash and debit cards.
How to minimize the impact of credits when closing your account
Closing your credit card can hurt your credit, but there are ways to minimize potential damage. Below are some strategies to consider:
Switch your recurring payment to another card
Automatic credit card payments are a convenient way to ensure that gym memberships, streaming subscriptions, or utility bills are paid on time. Before closing your card, don’t forget to switch repetitive payments to another card so you don’t miss out on payments or make late payments.
Check your credit report
After receiving confirmation that your account has been cancelled, check all three major credit bureaus (Equifax, Experian, Transunion) credit reports. Make sure your credit card is listed as a closed account with the comment “closed on a customer request.”
If there is a mistake, call the credit card issuer to correct the error.
Use other credit accounts responsibly
When closing one of your credit cards, use the remaining credit cards wisely.
Responsible credit card usage means maintaining low utilization by spending on means and making monthly payments. If you’re having trouble tracking card activity, consider setting up a balance update or payment reminder.
Alternatives to cancel your card
If you require one of your credit cards, but are not prepared for the potential hits of your credit score that comes with closing your card, there are other options to consider.
Ask the publisher what conditions are better
Interest rates and annual rates are not always set at stones. Sometimes you may be able to negotiate better terms with the credit card issuer. Consider asking your card issuer to match your competitor’s low interest rates or to waive your card’s annual membership fee.
Upgrade your secure credit card
Secure credit cards are supported by cash deposits and are useful for those looking to repair their credit. Instead of closing your card once your credits improve, ask your card issuer to upgrade to an unsecured credit card without closing your account.
Keep your card for small payments
If you have an unused credit card you don’t want to cancel, consider storing it in your wallet for occasional small purchases, such as parking fees and vending machines. Another option is to set up automatic payments from your card for monthly recurring bills, like streaming subscriptions.
Use other strategies to avoid overexpenditure
Closing your credit card is not the only way to stick to your monthly budget. Instead, try to join a no-payment task to suspend unnecessary spending or focus on using cash to pay instead of a credit card.
Some people use card locks to freeze their credit card accounts and prevent them from spending money.
Conclusion
Closing a credit card you don’t need is not necessarily a bad idea. There are many situations where you decide that canceling your card makes sense. However, consider ways to damage your credit by closing your credit card. If you are worried about credit, consider taking steps to minimize the impact of closing your account or alternatives to activate your card.
