Does terminating/canceling a credit card account hurt your credit? Let’s find out before you go ahead if you’ve decided to terminate your credit card account.
However, think twice before calling your credit card company to cancel the account. Terminating a credit card account might hurt your credit score.
However, if you plan, you may apply several tactics to avoid credit harm. Before you stop a credit card account, I will explain why canceling a credit card might harm your credit score as you read.
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Let’s Get Started.
Is It Preferable To Cancel Or Maintain Unused Credit Cards
The short answer is no. However, keeping unused credit cards active is advisable to benefit from a more extended average credit history and a larger quantity of accessible credit.
Credit scoring models reward you for maintaining long-term credit accounts and only utilizing a modest fraction of your credit limit.
However, there are some circumstances in which canceling a credit card account makes sense. If your unused card has a high annual charge, you’re concerned about spending management, or the account you wish to delete is new, canceling may be a better option.
Here’s what you should know before handing up your credit cards:
Keeping a credit card account open if you’re not using it may seem odd. This is especially true if you assume canceling an account will prohibit you from overspending, which is reasonable.
However, canceling a credit card may harm your credit score. Here’s how it’s done:
1. Increased credit use: Your credit utilization rate is the ratio of your current revolving debt to your overall credit limit.
The lower the interest rate, the better. Lenders will see that you are not using your credit cards to their limits and will have greater confidence in your ability to make responsible financial decisions with the credit they extend.
2. Reduced average age of accounts: Your length of credit history, or how long you’ve been actively using credit, is a less important element in your credit score.
When you terminate a credit card account, particularly the oldest, it contributes 15% to your FICO Score; the average age of your accounts decreases.
How Much Would My Credit Score Suffer If I Canceled A Credit Card
It is not complicated. Your Vantage Score dropped by 14 points in the first month after receiving the card.
On the other hand, if you paid down your bill after acquiring a new credit card, your Vantage Score would increase by an average of 11 points in the first month after getting the card.
When a card is closed, the numbers also have a similar appearance. If you decrease your balance, however, your score will increase by an average of 10 points, while an increase in your balance will result in a reduction of 12 points in your score.
Now, let me explain. Around two-thirds of cardholders carry a higher total load within the first month of receiving a new credit card.
It shouldn’t be surprising that people don’t often receive credit cards to store them in a drawer immediately.
However, more than four out of ten consumers who shut down a credit card carry a more significant debt on their remaining credit cards within the first month, leaving them with fewer cards but a higher total load.
(It is vital to note that this report did not discriminate between voluntary and involuntary closures. Some people who increased their balance after a card closure might have had that card closed by their issuer, which has occurred frequently since the beginning of the coronavirus pandemic.
This raises serious concerns and has significant repercussions on one of the most critical aspects of credit rating.
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Is It A Bad Idea To Cancel A Credit Card
No, that is the short and clear answer. It’s never a good sign when you fall behind on your payments. In contrast, canceling a credit card is almost always a poor decision, but there are a few instances in which it could be appropriate.
Before canceling a credit card, it is important to consider the state of the economy as a whole and your personal credit history.
The annual percentage rate of inflation for the period ending in March 2022 was 8.5%. Keep your credit cards on hand just in case you need them, even if you have secure employment and money set aside for unexpected events.
Before you cut up a card, there is one more thing you need to consider: the state of your credit history. It is critical to accurately understand your credit status to evaluate the potential effects on your credit score.
How Do I Get Rid Of A Credit Card Without Hurting My Credit
It is not complicated. Closing a credit card account without harming your credit score is possible.
If you want to protect your credit score, paying down balances on all your credit cards, not just the ones you’re canceling, should be your priority.
Therefore, canceling a credit card won’t affect your credit history (history is a factor in your overall credit score).
Now, let’s say you’ve concluded that closing your account is the best course of action.
The following are six easy guidelines that will assist you in navigating the process:
1. Before you call to cancel your membership, you should redeem any rewards that have been accumulated but not used.
2. Before canceling any of your credit cards, you should, ideally, pay off all your credit card accounts (not just the one you’re canceling) to a balance of zero dollars.
At a minimum, reduce the amount of money you owe as much as feasible.
3. You can cancel your credit card account by calling the issuing company and confirming that there is no balance on the card.
4. Send the card issuer a certified mail letter to cancel the account.
Ask for a written confirmation of your closed account status and $0 balance to be mailed to you in this letter and request that it be sent.
5. After 30 to 45 days have passed since your card was canceled, check all three of your credit reports to ensure that the account shows that it was closed by the cardholder and that the balance is $0.
6. Contact the three credit bureaus and dispute any incorrect information that may be found on your reports.
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What Are The Disadvantages Of Closing A Credit Card Account
Here are some of the most significant benefits of canceling a credit card you no longer use.
1. No need to worry about paying an annual charge:
A credit card with a yearly fee is a monetary waste, yet you never use it. One of the most compelling reasons to end an account is to get your money back by canceling the card.
2. You can get your deposit back if you have a secured credit card:
Many individuals start with secured credit cards since they are easier to accept but need a deposit. If you’ve graduated with an unsecured card, you should cancel the secured one to receive your money back.
3. You won’t be tempted to use the card and end yourself in debt:
Having much accessible credit might be tempting for certain people.
If you’re one of them, leaving an old credit card open might be an issue if you want to make a large purchase and use it.
Closing the account makes it more challenging to accumulate debt, which might be a wise step if you’re not confident you’ll make the financially appropriate decision.
4. You won’t have to remember to handle another card: If you leave a credit card account open, you’ll have to manage it.
This may not be a significant problem because forgetting it in your wallet is possible.
However, card companies will ultimately close if you don’t use them for a time. That implies you should charge anything on it regularly and pay off the bill after you’ve done so.
What Happens If I Close A Credit Card Account
The following happens when you close a credit card amount:
1. Closing a credit card may affect your debt-to-credit utilization ratio and your credit score.
2. Closing a long-standing credit card account may influence the duration of your credit history.
3. Lenders may terminate paid-off credit cards not used for a specified time.
You’ve paid off your credit card and are wondering if you should terminate the account – and whether this would affect your credit ratings positively or negatively.
The answer is dependent on your specific credit position.
Consider the following before closing a credit card account:
1. Closing a credit card may reduce your credit compared to the amount of credit you’re using (your debt-to-credit utilization ratio), which may influence your credit ratings.
Your debt-to-credit usage ratio may be calculated by summing up all your available credit and all the debt you owe on those accounts.
Divide the entire debt by the total credit available. Creditors and lenders like to see a smaller percentage of your total debt to your available credit.
2. Closing a long-standing credit card account may influence the duration of your credit history, another element used to construct credit ratings. In general, creditors want to see that you’ve handled credit accounts responsibly over time.
3. If you have a paid-off credit card that you haven’t used in a particular time period, the lender may consider it inactive and close it.
If you terminate a credit card account, check your credit reports to ensure the information is accurate.
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Final Thought
Now that we have established that canceling a credit card hurts your credit, That is not all.
Also, understand that Keeping credit card accounts active for as long as possible is a solid approach for creating and maintaining strong credit, especially if you plan to take out a loan soon.
Before canceling an account, consider its age and credit limit, your spending habits and any fees linked to the card.
Every financial decision is unique; while keeping unused accounts open is typically recommended, you may discover that shutting one is the better option.