Like many people, you probably have a wallet full of plastic.
However, you also probably only use the same couple of credit cards. So you might be looking at your unused cards and thinking that closing some of them is a smart money move.
But closing a credit card account (or not) can have far-reaching effects on your finances, ranging from the fees you are paying to your overall credit score.
Does closing a credit card hurt your credit?
Closing a credit card isn’t a direct mark against your credit score or history.
But does closing a credit card hurt your credit in other ways? The short answer is yes. Closing a credit card can affect your credit history in ways that could lower your credit score.
The biggest effect it could have is on your credit utilization, which is a measure of how much of your available credit you’re using.
Basically, if you close a credit account, it can lower the credit available to you. It’s something to watch for if you’re carrying a credit card balance.
Other factors like your credit card payment history and other kinds of credit or loans you have can also affect whether closing a credit card hurts your credit.
On the other hand, having a lot of credit cards is not that harmful to your finances or credit. In fact, consumers with the highest credit scores have an average of seven credit cards, more than those with lower credit scores, according to Credit Karma.
Reasons to avoid closing credit cards
If you’re considering closing a credit card, take a look at your credit cards and see how they affect your spending and credit.
There may even be some valid reasons to keep your credit card open, even if you feel like you have plenty.
You only have a few credit cards or loans
If you don’t have many credit cards or loans, closing one of them could have a negative effect on your credit.
Part of having a good credit score is maintaining a diverse mix of credit. So the more kinds of accounts you have on your credit history, the better.
You’re carrying a balance
Second, if you only have a few cards, it’s more likely that canceling one could cause your available credit limit to drop. And if you are carrying a balance, you need to be especially aware of this.
Make sure that if you cancel a card, your balance will still be equal to 30 percent or less of your total available credit.
Your credit cards all have low limits
Many people with lower credit or no credit will have low credit limits on their cards.
Having multiple cards might be the only way to add up a decent available credit amount. And the more available credit, the better your credit utilization ratios.
You have a long, positive payment history
If you’re looking to close a credit card, try to skip the accounts you’ve had the longest.
The age of a credit card account is actually favorable. Keeping open the credit card you’ve had the longest can benefit your score.
You have a big loan or purchase coming up
A credit score dip from closing a credit card is usually short-lived. You can recover if you keep up with other positive borrowing behaviors. However, this might take some time.
So if you’re planning on needing a high credit score in the near future, try to put off closing your credit card. Wait until your new loan, rental application, or other purchase is processed.
When to consider closing credit cards
While closing a credit card has its downsides, there are also some good reasons to make the move. Here are some signs you should cancel a credit card.
You’re spending too much
If you’re regularly spending more than you earn each month, closing a credit card might be smart.
Credit cards can actually lead to more spending, compared to paying with cash or even debit cards for everything. If your monthly credit card charges put your budget in the red, it might be time to ditch some accounts.
You’re concerned about credit card fraud
If you credit card account has had fraudulent or unauthorized charges, that could be a sign you need a new one.
Additionally, the more accounts you have, the more exposed you could be to identity thieves. So if you’ve had issues with credit card fraud in the past, closing a credit card could help you protect yourself from future incidents.
You’re sharing an account with an ex
Lots of spouses or family members might share a card. But it can become a problem if the relationship ends or one of the account holders is getting a bit out of hand with spending.
What’s more, you could be on the hook for any spending on the account by an authorized user you no longer trust. Closing the credit card could be justified in order to avoid contention and getting stuck footing the bill.
You’re paying high annual fees
When deciding whether to close a credit card, pay attention to the annual fees you’re charged for it.
Annual fees on credit cards can range from zero dollars to a couple hundred. So if you have a credit card with a high annual fee that you don’t frequently use, closing that accounts could be worth the savings.
You’re not using the rewards
One in five credit consumers has a credit card that doesn’t align with their current spending habits, according to a 2016 J.D. Power credit card survey.
If you don’t do a lot of flying, for example, an airline credit card might not make sense for you anymore. Or, maybe you aren’t spending enough every month to get cash rewards to compensate for the annual fee of another card.
Comparing your spending to what kind of cards you hold can help you identify credit cards that might be better closed.
How to close a credit card
After looking at your finances, you might decide it’s time to let a credit card go.
But the process for how to close a credit card is a little more complicated than simply cutting it up. Luckily, this handy worksheet can help you through the process of closing a credit card.
First, you’ll want to settle any outstanding balances on the account. You can pay it off with cash, or set up a balance transfer to move it to another credit card. This would also be a good time to cash out any rewards you’ve accrued.
Next, call your credit card company and inform them that you are closing your account. Make sure they will list the account as “closed at customer’s request” on your credit report.
You should also follow up in writing with a letter restating your requests to close the account. Make sure you also ask for written confirmation that the credit card is canceled.
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