Should you never cancel an unused credit card? Does it always negatively affect your credit score? Are there times it is actually better to cancel a card, based on APRs and annual fees?
If you own a credit card you no longer use, you may consider canceling that card.
The reasons vary, but your issuer might have:
Raised the annual percentage rate. Rather than canceling, try not to carry a balance. If you do, pay off that card as soon as you can, or consider a balance transfer offer and shifting that debt to another card.
Changed the rewards program or raised the annual fee. “I’d argue that an annual fee, which is usually less than a bar tab, is a small price to pay for immediate access to thousands of dollars of buying power,” says John Ulzheimer, a nationally recognized credit expert who once worked for FICO and Equifax.
Threatened to cancel a card you no longer use. Issuers may target your inactive account, so don’t give them a chance. Make small charges to the card every so often and pay off that balance immediately.
If you’re intent on closing your card, consider this: You might do yourself more harm than good. Before you make a decision, take these three steps. It may change your mind – or at least ensure your decision is a well-informed one.
1. Review your credit history
Look at how long you’ve held each of your cards. You can do this by searching for open accounts on your credit report. If the card you want to close is one you’ve held for years, you may want to reconsider.
Why? When computing your credit score, the three major credit reporting agencies take into account the length of time you’ve had a credit file open.
If your credit score is excellent, closing one card may not have a big effect on your standing. But someone who has less-than-stellar credit might not benefit from canceling a long-held card, as this could reduce the average age of your accounts, which in turn, can negatively affect your score.
2. Look at your available credit
Closing a credit card also will impact the percentage of available credit you have access to. This is known as your credit utilization ratio, and it’s another contributing factor that goes into computing your score. Generally speaking, the more credit you have access to and the less you use it, the better it is for your score.
“Both FICO and VantageScore’s credit scoring systems reward you for having a lower balance-to-credit-limit ratio, and having an unused card helps to keep that ratio lower,” Ulzheimer says.
If you own two credit cards, each with a $5,000 limit, and carry a balance of $2,500 on one, you’re using 25 percent of your total available credit. But, close one of those cards and now that balance uses up 50 percent of your available credit.
Anytime you close a card, it will lower your total available credit, which will in turn affect your score. How much will depend on how many other cards you have and how much total debt you’re carrying on those cards.
3. Look at the big picture
If the card has a hefty annual fee, or if you’re a hard core credit card maximizer who churns and burns through cards and their sign-up bonuses, then it may be worth it to consider canceling, but look first at your overall credit profile to see how it may affect your score.
If you find that you have more cards than you can handle, or you just want to simplify things, you may be better off putting that unwanted card in a drawer and forgetting about it. And, that card’s credit limit also will help factor into your credit utilization ratio, so even if you aren’t using it, the line of credit you were granted with that card can still help you.
“There’s really no good reason to close an unused credit card, unless it has been stolen or otherwise compromised,” Ulzheimer says.
Keep in mind that even an account that was in good standing when it was closed can remain on your credit report for up to 10 years.
How to cancel a credit card
Here are a few steps to take if you decide to cancel a credit card:
Pay off the balance: If you try to cancel a card with a balance, the issuer could raise your interest rate to the maximum allowable by law as a penalty for closing the account.
Contact the issuer: Call the number on your monthly statement, confirm that your balance is zero and notify the representative that you’re canceling the card.
Follow up with a letter: The letter should say that you’re closing your account and that you want your credit record to reflect that you’ve requested the account be closed.
Most people aren’t going to keep every card they’ve ever opened. So, here are a few recommendations for those times when you must dump a card:
Spread out closures over time so that your utilization doesn’t spike.
Keep your oldest account open to preserve credit history length.
Keep cards with high limits open.
Don’t close credit card accounts right before applying for a loan.
Also, scores reflect current monthly balances, so if you can pare down debt (or charge less if you pay in full) on other cards after closing an account, your score can make a speedy recovery.
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