Having a wallet full of plastic can be a big temptation to overspend, which can lead to missed payments and a decreasedÂ credit score. If too many credit cards have you busting your budget, this might be a goodÂ reason for credit card closure. On the flip side, closingÂ a credit card may hurt yourÂ credit score by messing with yourÂ credit history andÂ credit utilization rate.
Depending on your situation, there are reasons for credit card closure. Canceling a credit card isn’t a bad idea if you close accounts that cost more to maintain than they’re worth and do it in a way that won’t significantly hurt your score.
Why WouldÂ aÂ Credit Card Company Close YourÂ Account?
While you’re considering your reasonsÂ for credit card closure, your credit card issuer might be doing the same thing.Â AÂ credit card company has the right to cancel your card any time, and you may not get any warning it’s been canceled until it’s declined at the register.
AÂ credit card provider will close yourÂ accountÂ if you quit paying the minimum monthly amount due. Missing one or two payments may only freeze yourÂ account until you’re caught back up, but yourÂ account will probably be closed after six months of nonpayment. Credit card companies have many other reasonsÂ for credit card closure.
Common reasons that may promptÂ a credit card issuer to cancel yourÂ account include:
- Inactivity with a zeroÂ balance for several months
- A drop in yourÂ credit score, especially due toÂ late payments to other companies
- Eliminating the type of card you have and closing everyone’s accounts
- Going out of business because they’re no longer profitable
Do Closed Accounts Affect YourÂ Credit Score?
Closing anÂ account can affect yourÂ credit scoreÂ because it can change yourÂ credit history and utilizationÂ rate, which are two major factors used to calculate yourÂ credit score. YourÂ credit history is based on the amount of time all your credit card accounts have been open, so closing an olderÂ account can hurt.
YourÂ credit utilization is based on the amount of available credit you’re currently using, so closing anÂ account with a largeÂ credit limit and lowÂ balance can hurt even more. When deciding whether you shouldÂ close a credit cardÂ account, consider some reasons whyÂ credit card closure makes sense.
1. You’re Getting Divorced
If you’reÂ getting separated or divorcedÂ from a person who shares a jointÂ account with you, close theÂ account. Otherwise, you remain fully responsible for any bills your soon-to-be-ex might run up on the card. Even if your divorce decree says your former spouse will be responsible for the bill, you’re still on the hook as long as theÂ account remains open. The credit card issuer is only interested in collecting theÂ balance and will look to bothÂ accountholders forÂ payment.
2. You Don’t Want toÂ Pay the Fees
IfÂ yourÂ credit card company is charging an annualÂ fee that you don’t want toÂ pay, ask them to waive it. You can also ask them to waive a lateÂ fee if you’re accidentally late and you’re rarely late. If the credit card issuer won’t budge on a hefty annualÂ fee, it could be a goodÂ reason for credit card closure and taking your business where there’s no annualÂ fee.
3. The Card No Longer Makes Sense
Maybe you have a card you specifically opened to take advantage of frequent flyer miles because you traveled often for business. If your job no longer requires you to jet around the country or you move somewhere not serviced by the airline associated with thisÂ account, the card loses its appeal. Most airlineÂ rewards cardsÂ carry hefty annual fees after the first year, so it makes sense to close these accounts and switch to a card with a more usefulÂ rewards program.
4. The Card Has Been Used Fraudulently
Credit card fraudÂ is the bestÂ reason for credit card closure. Typically, the credit card issuer automatically closes yourÂ account and issues you a new card when your credit card has been lost or stolen. However, this isn’t always the case when your card is used in other potentially fraudulent ways, such as:
- You subscribed to a product or service online and, despite your best efforts to cancel the subscription, you keep getting hit with a monthlyÂ charge for something you no longer want.
- You provided your credit card number for the collection of monthly payments on a debt, but the company is taking larger payments than you agreed to make.
- You let your children use yourÂ account once for an emergency, and now, they use it every time another “emergency” occurs.
In these and similar situations, you may want to close yourÂ account. Otherwise, you risk having to fight to get future charges reversed.
5. You’re Done with Debt
You may have reached the point where you see no other way to get out of debtÂ than to cancel your credit cards. It’s best for yourÂ credit score to keepÂ a credit card or two open and justÂ pay theÂ balance in full each month, but this approach may not work for you. If you know you can’t resist the temptation of whipping out the plastic when you want something you can’t afford, it could be a goodÂ reason for credit card closure. However, before you make that decision, ask yourself two questions.
Is It Better to Close Unused Credit Cards?
Sometimes it can be better to close an unused credit card, especially if the card has a hefty annualÂ fee. When you don’t useÂ a credit card enough to outweigh the annualÂ fee and come out ahead on itsÂ rewards program, the card is costing youÂ money. It’s probably better to close anÂ account in this situation.
Is It Bad for Credit toÂ Close a Credit Card?
It can be bad for your credit toÂ close a credit card if the card your closing is one of your oldest credit accounts and/or has aÂ highÂ credit limit with a lowÂ balance. As previously mentioned, closing older accounts hurts your score by lowering the length of your credit andÂ payment history. Closing anÂ account can also hurt your credit by changing the amount of yourÂ revolvingÂ credit utilization.
How to Exit Gracefully
If you’ve decided that closingÂ a credit card account is the best course of action, try to minimize the damage to yourÂ credit score as much as possible.Â A credit card inÂ good standing offers a lot of positiveÂ credit history that stays on your credit reportsÂ longer if you keep it open.
Although closing theÂ account doesn’t make the card automatically disappear from your credit reports, you do lose the benefit of the available credit associated with thatÂ account. This changes yourÂ balance-to-available-credit ratio orÂ revolvingÂ credit utilization.
To understand theÂ credit utilization aspect of your credit reports, get a free credit report cardÂ from Credit.com. Calculate yourÂ balance-to-available-credit ratio by looking at your available credit compared to how much of this credit you’re using on individual cards and all your credit cards combined. When you’re using a significant portion of your available credit, you lose points when yourÂ credit score is calculated. Before closing anÂ account, keep these factors in mind.
1. Keep YourÂ Credit Utilization Ratio Low
An open credit line with a large limit and zeroÂ balance helps lower your overall revolving utilization, especially when you’re carrying balances on your other accounts. Keeping utilization at 10% is ideal, but you can still have a goodÂ credit score when using up to 25% of your available credit. Before closing anÂ account, calculate how it changes your overall utilization to ensure losing that available credit won’t hurt your score much.
2. Keep Accounts Open
If you have several old accounts, closing one won’t impact your score as much as it would if you only had a couple. Keeping as many of your older accounts open as possible is better for yourÂ credit score. If you have only one credit card, it’s seldom a good idea to close yourÂ account. About 10% of yourÂ credit scoreÂ is based on the different types of creditÂ you have.
3. Keep Oldest Accounts
Whenever possible, keep your oldest accounts open. Most scoring models consider the age of your accounts, including your oldest and newest accounts, and the average age of all your accounts. A seasonedÂ credit historyÂ helps keep your score healthy. A closedÂ account also eventually falls off your credit report, and you lose all the positive history associated with theÂ account.
After weighing the pros and cons, sometimes it just doesn’t make sense to keep hanging ontoÂ a credit card. Before you close thatÂ account, make sure yourÂ credit score won’t suffer too badly. Sign up for Credit.com’s Credit Report Card and receive the latest tips and advice from a team of credit andÂ money experts. You also benefit from a freeÂ credit score and action plan that helps you determine whether closingÂ a credit card account is right for your situation.
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