Credit cards can sometimes become a great nuisance. You might have to pay subscription fees for a card that you barely use; one of your older cards might have an unreasonably high APR; the cards in your wallet might tempt you to spend more. A quick solution to all of these problems would be to cancel the cards and close the accounts.
But pause and think - is that a constructive solution? Canceling credit cards might set off far-reaching ripples that can jeopardize all your efforts of building a good credit history. You must not act upon a whim. We, at mymoneykarma, want to help you comprehend the consequences of such a move so that you take the right action.
When you close an account or a line of credit, your credit score takes a blow. Let's quickly recapitulate how an account closure can affect your credit health:
Your credit limit gets reduced
Your credit utilization rate increases
You lose the variety in your credit mix
Your average credit age falls
All of these can negatively impact your credit score. There are certain advantages and disadvantages of closing a credit account. So before you decide to close one of your accounts, read this article and find out about the dos and don'ts of closing a credit card account.
Do you have an old credit card that you hardly use, yet you pay a subscription fee for it? Well, that doesn't sound economical. But at the same time, an old credit account is healthy for your credit record.
You could go ahead and close the account, but we suggest that you talk to the card issuer before doing so. Many companies wouldn't want to lose their customers, and would easily give you an annual fee waiver if you approach them.
You must keep a few credit accounts open if you wish to keep your credit score healthy. Creditors will consider you trustworthy if you can show some active and responsibly maintained credit. Closing too many accounts will shoot up your credit utilization rate and negatively impact your credit score.
If you assume that all your credit card activities will be reported by the end of your billing cycle, you may be wrong. Card-issuing companies might delay the process. Credit bureaus might also take some time in updating your recent record.
Check your credit report from time to time to ensure that there isn't any discrepancy. Reporting errors are quite common and might go unnoticed if you don't take the necessary action to get them rectified. You wouldn't want your credit report to show an error pertaining to an old and canceled credit card.
Your oldest credit account serves as a timestamp and sets the history of your credit age. If you close it, your credit history appears shorter and pulls down your credit score. Consider upgrading or downgrading your card, but make sure that you keep the account open and active.
Sometimes things out of our sight go out of our minds. Don't let that happen with your credit cards. If you wish to close an account, find out the process and follow it strictly. Don't ignore or throw away the card and forget about it. You must not leave such loose ends. Don't expect that inactive accounts will close automatically. Follow the necessary formality. You will receive a closing-confirmation letter from the issuer when the process is completed.
Doing so is a suspicious move, and it will leave creditors wondering if something is amiss. Moreover, it would also magnify the negative impacts of a single closure. It's preferable that you space out the account closures over time to reduce the impact on your credit health.
Balance transfer cards could be an easy solution to repay an outstanding credit card amount which has a high APR. However, balance transfer cards don't make your debt disappear. They just give you relief from high-interest rates for a short period.
You must have a foolproof plan of repayment chalked out in your mind before opting for a balance transfer. You should be able to repay the amount within the limited promotional period when your new balance transfer card offers a low interest rate.
Closing credit accounts might set forth severe repercussions. If you desperately need to close one of your credit cards, you need to educate yourself on how it might affect your credit health and then make a calculated decision. Make sure that you evaluate the risks of your situation before taking a plunge.
Whatever your decision may be, make sure that you check your credit score to keep track of your credit standing - be it before or after cancelling your card.