Why You Shouldn’t Close Your Credit Card Account (and a Few Times When You Should)
If you have an old credit card that you never use, you might be tempted to give it up. After all, debt is bad, isn’t it? Well, canceling your card has some implications for your credit score , so you need to consider all your options first. Here’s what you need to know.
Why you shouldn’t cancel your old credit card
Closing a credit card can negatively affect your credit score, which will affect your ability to qualify for loans at favorable rates. Here’s how closing your old card affects your credit:
- Reduced Credit Utilization: 30% of your score is based on your credit utilization ratio, which is a measure of how much of your total credit you are currently using. For example, buying $ 1,000 with a $ 10,000 line of credit gives you a 10% loan utilization rate. However, canceling the card lowers your credit limit and can push you to use more than 30% of your credit, which will damage your score.
- Reduced average age of accounts: 15% of your credit rating depends on the length of your credit history or how long you have been actively using the credit. Closing your old credit card account will lower the average age of your accounts and therefore lower your score even further.
- Credit Balance: 10% of your credit rating is related to your credit balance. It doesn’t bother you if you have other cards, but it can have a bigger impact if you close the only credit card you have.
That being said, there are good reasons why you might want to cancel an old, unused card:
- To avoid overpriced annual fees (typically $ 500 or more for premium cards)
- You already have other lines of credit that will lessen the impact on your credit rating.
- To avoid sharing the card with someone else (for example, divorce)
Consider downgrading your card if you have an annual fee.
If your card is charged a fee, Ted Rossman, Senior Credit Card Industry Analyst at Bankrate.com, recommends calling your lender and asking for a downgrade (you might call this “product change” when talking to the company). Just make sure you confirm if your existing card’s credit history will be transferred to the new card.
Use it or lose it
Whether you’re using a downgraded card or just keeping the one you already own, use it at least once every three months as credit card companies will close inactive accounts. To avoid this, consider using your card for small, recurring purchases, such as a Netflix subscription, and set up your bank account to be automatically paid every month. Then put the card away somewhere you’ll forget it, such as a drawer, so you won’t be tempted to use it.