Thoughts on Canceling Credit Cards

Thoughts on canceling credit cards

Why canceling credit cards may be a bad idea.

Canceling a credit card is a serious move, even if it doesn’t seem like it. 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.” However, it’s not that simple. Here’s what you should know about canceling credit cards.

Much of the time, 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:

  • 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 lengthens your credit history.
  • 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.

Is There an Annual Fee?

Now that you know all the reasons to keep a credit card account open, let’s look at the most common scenario for closing a card: The annual fee.

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 outways the annual fee, then it may make sense to keep it.

If you want to keep the account but want to find a card with no annual fee, you may be able to downgrade your account to a different card. That way you keep the account open but aren’t saddled by the yearly charge. Call the card issuer to see what they can do.

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.

Chris O'Shea

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