Do you remember your first credit card? Whether a salesperson on your college campus convinced you to sign up in exchange for a slice of pizza, or you and your parents intentionally visited your local bank or credit union, one thing is almost certain: Unless it’s your only card, it’s probably not the best card in your wallet. After all, lenders don’t want to give just any card to someone who has no credit history. Most likely, it has a low credit limit, high interest rate and/or few rewards.
Once consumers build up their credit health and add better cards to their inventory, they’re often tempted to cancel their oldest cards, thinking they’re not needed. And in most cases, those “starter” cards probably aren’t needed. However, closing your credit cards, whether old or new, could affect your credit score, so this decision shouldn’t be made lightly. If you’re considering closing any of your cards, here are a few tips to keep in mind:
Know how it will affect your credit. Sadly, while closing your cards will never help your score, it definitely has the potential to hurt it. Here are some areas of your credit it may affect:
- Credit card utilization rate. When you close a card, you reduce your overall available credit. Unless you scale back your spending, this will negatively affect your credit utilization rate, which is one of the most significant factors used to calculate your score. Therefore, even if you don’t want a card anymore, it may be worthwhile keeping the card open – just to lower your utilization rate.
- Average age of accounts. Closing a credit card won’t affect your average age of accounts right away, as closed accounts in good standing will typically remain on your report for 10 years, and negative payment history will remain on your report for seven years. However, if you close a card that is significantly older than your other cards, it could lower your average age when it finally falls off your credit history and subsequently lower your score. Bottom line: If you’re relatively new to credit, it’s best to keep your oldest card open, especially if it has a positive payment history. Closing it can hurt your score more significantly than it would for someone who has a much longer credit history.
- Number/mix of accounts. Again, this won’t impact your score for a while. However, most scoring models take into account your number of accounts and mix of credit types, so closing your only credit card could come back to haunt you.
Try bargaining with your credit card provider. In many situations, it costs lenders more to find new customers than to retain old ones, so if you want to cancel a card simply because it has a high APR or an annual fee, first try requesting a lower interest rate or ask the issuer to waive your fees. The lender doesn’t have to entertain your request, of course, but it never hurts to ask! And if you can save some money while keeping your positive payment history, it’ll be well worth the trouble.
Consider canceling cards that are costing you money. If your card has an extraordinarily high interest rate or miscellaneous fees, and your provider isn’t willing to compromise, you may want to consider closing the card – especially if you don’t use it. Your credit score is important, but wasting money just doesn’t make sense.
Know that canceling a card involves more than snipping it in two. Closing a credit card is a big decision, so if you make it, commit to it. Even if you cancel via telephone or online, follow up and ensure it’s cancelled by sending a certified letter to the customer service department and asking for a confirmation letter. It can take a while for your lender to process the change, so sit tight! Once you’re certain it’s closed, you can cut up your card.
Monitor your credit. The credit bureaus don’t always have your credit history 100 percent accurate, and it’s up to you to watch your credit and dispute errors. Remember: While your closed accounts and their payment histories will stay on your report for seven or more years, they should be marked as “closed.”
Close all your cards. In addition to potentially damaging your score in the future, closing all your cards may put you in a bind if you’re ever in an emergency and need credit – trust us, you don’t want to have to take on a predatory loan aimed at those with subprime or no credit. There are less drastic ways than closing all your accounts to handle your debt load, so take a moment to breathe and consider alternative solutions before making any rash decisions.
Close cards before financing a major purchase. When applying for a mortgage or auto loan, you want your score to be as high as possible so you can score the lowest interest rates. Plan ahead. Now that you know canceling a credit card may affect your score, don’t let a spur-of-the-moment decision cause you to pay thousands of extra dollars in interest over the life of your loan.
Close cards with favorable terms. Of course, no card is perfect. But if your card has a low interest rate, no annual fee and other perks, it may be worth keeping it open just in case you need it in the future. If you close the card, hurt your score and end up having to apply for more credit later, you may not be able to get as good a card as the one you closed.
Forget to use your open cards. It costs money for lenders to report to the bureaus, so if you don’t use your cards for a while, the company may stop reporting them. This could impact your score, so if you’re keeping cards open just to keep them open, try placing one small, monthly, recurring payment on your cards (and paying them off every month, of course) to ensure they remain active.
The Bottom Line: Ultimately, the decision to close a credit card is yours alone. However, by taking into account your personal situation and remembering these tips, you should be able to make an informed decision you won’t regret.