Thoughts on Canceling Credit Cards

Canceling or closing a credit card is a serious move, even if it may not seem like a big deal. You might have moved on to a new credit card that is better for you than your old one and think, “Well, I’ll just cancel the old card and be done with it.” Before you do, here’s what you should know about canceling credit cards.

Why You Shouldn’t Cancel an Old Credit Card

In most cases, canceling a credit card is not a good idea. The reason for that is that keeping a card open can help your credit score in many ways. Here are just a few factors that an open card boosts the various components of your score:

• Credit Utilization. This is the total balance of your accounts compared to the total available credit limit. You want your ratio to be below 30 percent, so keeping a card open helps your overall limit.
• Payment History. Paying your bills on time, every time, is a huge factor in your credit score. If you keep your card open by making small charges and immediately paying them off, your history gets a nice boost.
• Credit History. Keeping that card open allows you to keep all the credit history you’ve built over time.
• Credit Mix. Another way to help your score is to have a bunch of different credit accounts. If you cancel your card, that reduces your credit variety.

Reasons to Consider Closing an Account

While there are viable reasons to keep an old credit card open, there are also a few reasons why you might want to close or cancel an account.

• Annual Fee. Let’s look at the most common scenario for closing a card, which is a high annual fee.
  • Weighing the Balance. You might have a card that you rarely use that has a large annual fee. It may not make financial sense to keep the card if you’re incurring an annual fee. But if you are gaining a benefit from keeping the card that outweighs the annual fee, then it may make sense to keep it.
  • Switch to Stay. If you want to keep the account but want to find a card with no annual fee, you may be able to switch to a different card. That way, you keep the account open and maintain the credit history you’ve built, but aren’t saddled by the yearly charge. Call the card issuer to see what they can do to help.

• Fraud. If the old card is the cause of ongoing fraud issues, it may make sense to close the card to end the continued fraud risk.
• Reducing Spending. You know your spending behavior. If having another open credit card is too big a temptation for you, then by all means, close that card. It’s better to close a card than to rack up unnecessary spending and debt.
• High Rate. If your open card has a really high interest rate and you have other cards with much lower rates, it may be a good idea to close that card.
• Simplicity. If you have too many cards that you can’t keep track of payments and due dates, canceling a card can be a solution to make your life easier. You’ll have to weigh the benefits and see what makes sense for your situation.

When Do Closed Cards Fall Off My Credit Report?

If you decide that it’s best to close a credit card account, what happens next? Here are some thoughts on how long closed accounts stay on your credit report.

Closed Accounts

• If you close a credit card account, it may not fall off your credit report immediately. It depends on whether the closed account had a positive or negative history.
  • Positive History. Accounts with good payment history and on-time payments can stay on your credit report for up to 10 years.
  • Negative Marks. The opposite is also true; poorly managed accounts with negative or adverse marks can hurt your score and stay on your report for up to 7 years.

What is Considered a Negative Mark?

Negative information on your credit report is defined by creditors and lenders, credit bureaus, and Federal Law.

• Lenders (banks, credit card issuers, collections agencies) determine the following:
  • If a payment is considered “late.”
  • If and when an account goes to collections
  • When an account is “charged off.”
  • If and when a debt is settled or paid off

• Credit Bureaus maintain your credit report and decide:
  • What and when to add reported information to your file
  • Apply rules for the length of time negative marks remain on your report
  • Remove negative information based on the legal requirement

• Federal Law. The Fair Credit Reporting Act (FCRA) sets the maximum time-period negative marks stay on your report.
  • Late payments, collections, and charge-offs up to 7 years
  • Bankruptcies 7-10 years, depending on type

Bottom Line on Closed Accounts

There is good news. Closed accounts with a good payment history of on-time payments will typically stay on your report longer than negative information. If you have a negative mark on your credit report, take heart. It will take time, but it will fall off your report eventually.

Do One Thing: Keep your credit cards open even if you rarely use them. In most cases, doing so is well worth the credit score boost.