Credit cards come in handy for shopping, getting cash when broke, and earning points that are redeemable for various things. However, there are times when canceling a Credit card is the best decision.
Reasons for closing a credit card account
Irresponsible spending behavior
With some people, the temptation to go on a shopping spree with a credit card is irresistible. Although cards offer great convenience, they are still money, just in another form, and thus come at a certain cost. While closing a credit Account due to your inability to control your spending is a good idea, you also need to become responsible and develop better spending habits.
Also, you can avoid carrying your card with you unless you have properly planned how to use it. Without the card at your fingertips, this could inhibit the temptation for impulse buying.
Some card issuers charge exorbitant annual fees for credit cards that you do not use. If this is the case with one of your cards, closing it could be a good option, but first, you should consider some things. Do you get other benefits or perks from the card, like travel credits, which far outweigh the annual fees you are charged?
If yes,then you can keep the card. It would also be prudent to talk to your card issuer before canceling it and letting them know you want to close it due to the high fees.They may give you a pleasant surprise and waive the fee.
Divorce or separation
During the process of divorce or separation, it is always advisable to cancel any joint credit cards. You need to do this, as you are liable for any charges on the account—whether past or future. It is possible for a bitter former lover to run charges on a joint account out of malice. Although your divorce contract may have relieved
you of any future obligations on the card, the card issuer could still come for you.
Benefits of keeping a credit card
Ideally, you are better off leaving your credit card accounts open if there are no valid reasons to justify closing them. Maintaining your credit cards is beneficial for the health of your credit since some of those factors that carry more weight in your credit score—the average age of your accounts and the credit utilization rate—can
be affected by closing your account. Also, having a credit card adds to the variety of your credit.
Tips when canceling a credit card
Canceling a credit card involves more than taking a pair of scissors and snipping it.Here are some steps for closing your account permanently without hurting your credit score:
➢ Find out the various customer service departments you need to get in
➢ Redeem any points accumulated on the card before calling or sending
that email to cancel it. Otherwise, you will lose your points.
➢ Should the card have any balance, pay it off fully, or transfer to
another card that has better terms.
➢ Get in touch with the card issuer, find out if the balance is nil, and ask
to close the account.
➢ Make a formal request in writing to have the account closed so you
are certain it is done.
➢ Check your credit report a month after the request of cancellation to
be sure it is marked “closed.”
➢ Be on the lookout during the cancellation process to ensure all goes
➢ Dispose of your card appropriately once you confirm the closure.
How canceling a credit card can affect your score
Closing a credit card account can affect your credit score in a negative way, so you should avoid closing any unless it is necessary. Here are some ways it hurts your score:
Increasing utilization ratio
Canceling a credit card affects your score because you lose the credit that you had from that card. For example, you have three cards:
- Credit card X, with a limit of $1,500 and an outstanding balance of $500
- Credit card Y, with a $2,000 limit and a $1,000 balance
- Credit card Z, which has a limit of $4,000 and a $0 balance
Among the biggest contributors to your score is the total debt that you have, and the the debt-to-credit limit ratio is called the Utilization Ratio. It is recommended you maintain a utilization ratio of less than 30% to avoid any adverse effects on your credit.
In the above scenario, you have a utilization ratio of 20%. But what if you canceled card Z and your outstanding amount remains the same? Your utilization ratio would jump to about 43%. So, closing a card account makes you lose the available credit on that card, thereby causing your utilization ratio to increase, and ultimately hurting
your score. You seem to have more debt compared to your limit, hence your score dips. However, in normal cases, you will see your score rebound in a month or two.
In addition to keeping your utilization ratio as low as possible to improve your score,you can adopt other strategies, including engaging credit-building experts to help you improve your score with trade lines. For such services, look no further than the Boostcredit101 website.
Interrupting your credit activity
Closing a credit card can disrupt the activity in your account and affect your score negatively. This is due to the fact that the algorithms that credit companies use to compute your score are not so good at interpreting alterations in your credit report instantly.
As such, moving a card from open to closed could result in a temporary and slight drop in your credit rating as the company becomes aware of what is happening.For both of these cases, the drop is short-lived; however, if you are planning to apply for a credit card in the near future, you should avoid closing a card account, as it may cause a drop in the score.
Effects of closing credit account on credit history
Although many believe that closing a credit card account will make you lose that card’s history, this is not exactly the case. When you close a card account that had no issues (no balance or late payments), the credit bureaus maintain that account on your report for 10 years from the date of closure.
Canceling a credit card can have benefits and disadvantages depending on your situation. It could help to cut unnecessary spending, to avoid going deeper into debt,and to avoid high annual charges. On the other hand, it may hurt your score by raising the utilization ratio and disturbing your credit activity.
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