How closing a credit card account affects your credit score
Remember the excitement surrounding your first credit card? He probably applied for a credit card when he went to college or maybe his parents offered some advice. Either way, he’s had that card since he was in his teens or early 20s and it’s probably not the best card in his wallet. He may have a high interest rate, no rewards, or a high annual fee.
Once you started to build good credit, you were probably offered better credit cards. Your interest rates are lower, you probably don’t have an annual fee or it’s a low fee, and you probably have access to airline miles or cash back rewards. So why keep the card that no longer works for you?
How will closing accounts affect my credit?
The important thing to remember is that when you make the decision to close a credit card account, you are reducing your credit utilization ratio. Remember that credit utilization accounts for 30 percent of your total score calculation. You’ll need to cut back on your clothing spending when you close a credit card account or you’re likely to exceed the recommended utilization rate of 30 percent, sending your credit score plummeting.
The average age of your credit accounts is another important factor in your credit score. This is double. If you’re new to credit, it’s best to keep old cards open because they will stay on your credit for 10 years. That card, while rarely used, is actually helping your credit, especially if you have a good payment history. Closing it could hurt your credit much more than someone who has been building their credit for over a decade.
So what can I do?
If you have a high interest rate or high annual fee, try negotiating with your credit card provider. Sometimes if you tell them you are considering canceling the card due to high fees etc. they can work with you. It costs them a lot more money to acquire a new customer than it would to waive their annual fee or lower their interest rate.
Sometimes you have to close a card. If it’s costing you money because the credit card company won’t negotiate a waiver or lower annual fee, there’s no point in keeping it. Your credit may take a hit, but it will bounce back. However, you cannot recover funds lost due to annual fees on a card you don’t use.
Closing a credit account should not be taken lightly. Be sure to consider the factors listed above before closing your accounts.
