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Ready to cancel a credit card? Don't get out the scissors yet! There are a few important steps to take to ensure closing your card doesn't drag down your credit score. Whether you're sick of paying an annual fee or want to spring clean your wallet, here's everything you need to know about how to cancel a credit card.
Canceling a credit card boils down to closing your account online or calling your card issuer and canceling over the phone. But before you close that card, however, it's important to follow some steps to ensure you prevent or minimize damage to your credit score:
Yes, canceling a credit card can hurt your credit score. To be sure, credit reporting bureaus don't care that the card itself is canceled. Rather, it's the side effects of canceling the card that can affect your score, such as increasing your credit utilization ratio or reducing the average age of your credit history.
Credit utilization measures how much total credit you have against how much credit you're using. Since it makes up 30% of your FICO? Score, it plays a commanding role in the calculation of your credit score. Canceling a credit card affects your credit utilization by lowering how much credit you have and increasing the percentage of how much you're using.
For example, let's imagine your credit card balances add up to $5,000 and all of your credit limits add up to $20,000. Your credit utilization rate is your balances ($5,000) divided by your limits ($20,000), or 25%.
Now let's say you close a credit card with a $10,000 limit. When you close that card, your overall credit limit drops from $20,000 to $10,000. Your credit utilization is still your balances ($5,000) divided by your limits ($10,000), but now your credit utilization ratio shoots up to 50%. The higher utilization ratio will likely damage your score until those balances are paid down.
You can calculate your credit utilization rate by adding up how much you owe across all of your credit cards, then dividing that by your total credit limit across all credit cards. Ideally, it's good to keep your credit utilization below 30%.
The average age of all your credit accounts and the age of your oldest account together make up about 15% of your FICO? Score. If you're closing an old credit card -- or a recent one but your credit history is young -- you might impact your credit score by canceling it. How much impact will depend on your credit history, but it could be as insignificant as a few points or as gut-wrenching as a double digit drop.
It's not necessarily bad to close a credit card account. While closing a credit card can hurt your credit score, sometimes it's the right choice. Below are some good reasons you might want to cancel your credit card.
In general, if canceling a credit card doesn't improve your personal finances in some capacity, you may want to think twice before canceling it. While it's ultimately your choice whether to cancel, here are a few commonly stated reasons that might warrant some more thought.
|If you overspend, consider...||Leaving the card at home so you have it for emergencies. You can consider (literally!) freezing the card in a block of ice so you can't use it impulsively, or asking a family member to hide it in a safe place.|
|If it has an annual fee, consider...||Downgrading to a no-annual-fee version. This will leave your credit history intact while you avoid paying fees for a card you don't use.|
|If it has a high interest rate, consider...||Asking your credit card issuer for a lower interest rate, or doing a balance transfer to a card with a lower interest rate.|
|If it doesn't match your spending habits, consider...||Leaving it open if it doesn't have an annual fee, and opening another credit card that fits your spending habits better.|
|If you rarely use it, consider...||Leaving it open if it doesn't have an annual fee, and putting one or two small, recurring bills on it so it doesn't get closed for inactivity.|
|If you want better rewards, consider...||Asking about a product change. You might be able to swap out the card for a different one that offers rewards more suited to your spending habits, and you won't lose your account history.|
While closing a credit card can hurt your credit score, sometimes it's the right choice. If you do close a credit card, you can help your credit score by opening a new card that better suits your needs or requesting a credit limit increase with one of your current cards. These will help keep your credit utilization low and protect your score. Knowing how to cancel a credit card properly will help you minimize negative impact on your credit.
Here are some other questions we've answered:
Yes, it's totally possible to cancel a credit card with little or no damage to your credit score. If your credit utilization is low or near zero, for instance, canceling a card may not have a major effect. Likewise, if the card was recently opened, it might not hurt your credit history's average age.
No, it's not bad to close a credit card. In fact, it might help your personal finances to cancel one, especially if you're prone to carrying credit card debt.
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