November 17th, 2009
Thinking about Canceling Your Credit Card?
The exorbitant interest rate hikes, cut credit limits, and unexpected new fees have made owning a credit card more of a pain than it might be worth. But before you take scissors to your MasterCard, read ahead on for what to consider before canceling your card :
- Right off the bat: don’t cancel your credit card. Why? Your credit score can be negatively impacted by closing a credit card because it affects two major influencers of your credit score – your credit utilization and your credit history. Firstly, do not cancel your oldest credit card; it anchors your credit history to show how long you have been managing credit, so canceling will shorten your credit history and heavily damage your credit score. Also, credit utilization looks at your total credit balance against your total available credit of all your cards; the lower the ratio, the better. When you close a credit card before fully paying off any outstanding balance, that credit line is no longer taken into account but your outstanding balance of unpaid credit is, so your outstanding debt as a percentage of available credit will increase and the higher utilization rate ding your credit score.
- For example, you could have an outstanding balance of $10,000 with a total credit limit of $50,000, bringing your ratio to 20%. But if you close a card that had a $20,000 limit, your ratio immediately jumps to 33%.
- Instead, keep your cards active—just pay responsibly. The key to a good credit score is on-time payments and active use of your credit. If you just stop using your credit card all-together to avoid any late fees or charges, your issuer might close your card and consequently lower your credit score. Instead, use your credit cards to make small purchases on them that you pay off ON TIME and IN FULL every month. That way, you can show responsible credit use and avoid any interest charges or additional fees.
- …except if you have an annual fee.The only exception to the “don’t close your credit card” rule is a card with an annual fee. If you don’t plan to use a credit card that has a steep annual fee, its probably worth it to close your card and just take the hit to your credit score rather than spending needlessly on an annual fee.
- If your interest rate jumped or you have extra charges, negotiate. You can negotiate with your issuer to lower your interest rate or opt out of a fee. Some banks may also offer a promotional program to defer or get a good rate on your current balance. Cardholders with excellent credit scores and great payment history have a good shot at this because issuers are more likely to compromise with you rather than lose a good customer.
- Don’t add any more credit cards! The danger in owning more credit cards is that the more access to credit you have, the more you are tempted to overspend credit without the funds to back it up. While opening new credit cards will lower your credit utilization rate, opening a credit card just to try and boost your credit score can backfire if your issuer decides to add an annual fee, change the card’s terms, or you carry a balance that is costing you more in interest charges. Stick to credit cards with low interest rates and no annual fee, and ignore the temptation to open a new credit card just for a rewards program, a retail discount, or that really cool t-shirt you just have to have.
- Build up your credit score! Build your credit history and be mindful of your credit score. For example, paying down your credit card debt rather than closing it all together can actually help your credit score. Even if you don’t have the best credit card right now or are still in credit card debt, a better credit score down the road can qualify you for better credit cards with lower interest.
At Credit Karma Blog, what goes around comes around… So what do you think about this post? Agree, disagree, or have something more to say? We’d love to hear your reactions!
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If you closed a credit card account wouldn’t your credit score begin to recover fairly quickly?
there are many people who are not aware of the existence of personal grants. It is indeed a great opportunity for you. You shouldn’t miss any grant that you are eligible for and you should fully utilize it to reduce your burden of debt. You will definitely be able to improve your financial situation.
Man, I am so sick of warnings from financial experts not to cancel credit cards. If you have cards you don’t want anymore just cancel the damn things! The world won’t end!
I’ve canceled three cards in the last two months and I’ll probably cancel more. It’s just not worth the hassle and bookkeeping effort to keep a bunch of cards around that I don’t want. Every active card is just another target for identity thieves and another opportunity for the bank to ding me for being late/overlimit or some other garbage fee. If closing these cards hurts my credit score I really couldn’t care less. There are far more important things in life than credit scores.
thanks for making me realize the importance of my credit card. now i won’t have to cancel it no more.