If you are not using one of your credit cards and are considering closing it, then it is important to acquaint yourself with some essential things. Firstly, closing a credit card would lessen your credit score. Secondly, rather than closing it, you can explore the possibility of upgrading it to a better card. Also, if you don’t want to pay the annual fee anymore and you are an old credit card holder, you can speak to the issuer and receive a fee waiver or a better offer. Hence, be conscious of your choices and then decide accordingly.
Here is everything you need to know about closing a credit card.
Closing Credit Card: The Impact
If you are closing your credit card, you can have various impacts:
1. Reduces the Credit Limit
Your total credit limit is the sum of all the credit limits you have on all of your credit cards. Getting one of the credit cards closed means lowering your total credit limit.
2. Increases CUR
When you drop your credit limit, you will increase your CUR or credit utilization ratio. The credit utilization rate is an important determinant in calculating the credit score. A low CUR is a healthy sign to the lenders, but a high credit utilization rate means more dependency on your available credit. The experts suggest that your credit utilization rate should not exceed thirty percent. A lower credit utilization rate can fetch you a good credit score.
3. Lowers Credit History
If you were going to close one of your oldest credit cards, then it is important to know that doing so will decrease your credit history. The length of your credit is another important aspect considered while calculating the credit score, just like credit utilization is. It is advised to have a long credit length for a great credit score. A credit length means the average age of all your credit accounts.
When you close the old credit card, it will shorten your credit length. This can damage your credit score as it will lower the average age of all your credit accounts. To prevent lowering your credit points, we suggest that the individuals must conserve their credit history and try having a longer payment.
4. Reduce Credit Mix
Credit diversity also accounts for a good credit score. Closing one will lower one of your revolving credit accounts. Be more mindful if this is your only revolving credit.
5. Lowes Credit Score
Finally, closing credit card affect credit score. As stated earlier, closing your credit account lowers your credit length, limit, and credit score. However, you can boost your credit score again in a few months by practicing healthy credit habits like making your bill payments timely.
When is the Right Time to Close Your Credit Card?
You can consider closing your credit card if:
- your credit card is charging a very high annual fee.
- the card levies a high interest.
- your credit card does not offer many benefits
- you are unable to manage multiple credit cards or debts
- having a credit card is tempting you to make extra spending
- it is a student card or secured card, that is not getting changed or updated by the issuer.
When Should You Avoid Closing Your Credit Card?
You should ensure to keep your credit card open if:
- it is your oldest credit account.
- you have only a few credit accounts
- you are not paying a very high fee/interest on your card
- it is a profitable account
- you have high outstanding on other credit accounts. Closing this one will severely impact the CUR.
- the lender is ready to upgrade your old card to a more rewarding one
How to Close Your Credit Card and Not Drop Your Credit Score?
If you cannot stop yourself from closing the card, here are some ways to close it and not damage your score.
- Clear all the outstanding debt and then close the credit card. This will prevent impacting your credit utilization ratio.
- Requesting the lender to increase your credit limit on your other credit cards. This will offset the decrease in your credit limit when you close one card.
- redeem the pending rewards, if applicable.
- Change the setting from the auto-pay credit card and move it to other options.
- You can close your credit card and immediately open a new credit. This way, you will prevent the credit history, credit limit, and credit score from decreasing.
Speak to the issuer that you are closing the card and ask for acknowledgment that the account was successfully closed by them. Provide your personal and credit account details in the document. Do not miss destroying your card to avoid potential identity theft.
Alternatives to Closing a Credit Card
If you are looking for alternate ways for not cancelling the credit card, here we jot down a couple of tips for you.
- Speak to your credit card company and ask them to lower or waive the annual fee. The companies might oblige to retain you and downgrade your card.
- Keep the card in the bank locker or use it only once for trivial purchases if you are worried about the temptation of overspending. However, do not forget to pay regular bills.
Wrapping Up
Closing a credit card impacts credit score and not good for your credit report. Try not to close your card, but if you have to, do it more strategically. Know when you should close your account. If you happen to drop your credit score, you can rebuild it. Connect with Due Factory for support.
FAQs
1. Does Closing A Credit Card Affect Credit Score?
Ans. Yes, closing a credit card can drop your credit score. It lowers your credit limit and increases the utilization ratio. Also, it shortens the age of your credit accounts and lowers your credit score.
2. When should I close my credit card?
Ans. You can close your credit card if it is charging a very high annual fee or interest, the card does not offer many benefits, it is becoming harder for you to manage multiple credit debts, and the card is tempting you towards extra spending.
3. How to improve your credit score after closing the credit card?
Ans. You can use a new credit card to improve your credit limit, pay off the existing bills, repay your monthly dues timely, diversify your credit accounts, etc.
4. When should you keep the credit card open?
Ans. You should keep it open if it is your oldest credit account, you have only a few credit accounts, you are not paying a very high fee/interest on your card, it is a profitable account, and you have high outstanding on other credit accounts.