The oh-so-important question. But before we get into the answer, let’s look at why people might consider closing a credit card:
- To curb their spending habits. Remember Rebecca Bloomwood? Yes, she’s the lead character of “Confessions of a Shopaholic” who hit rock bottom due to her shopping addiction. There was a scene where she had to use the remaining limit on three of her cards just to buy a scarf. For her, closing her credit cards is the best option – that is, after settling all her dues. But if your spending habits are totally unlike hers, closing a credit card may not be your best bet.
- To avoid hefty annual fees. Yes, it is a fact that credit cards have annual fees, but you can always contact your lender to convert your account to a lesser or even 0% annual fee. Don’t worry, they will work with you. These companies do not want to lose clients, especially those who have glowing records.
- To prevent identity thieves. Did you know that hackers have a way of getting into your accounts? They love those which seem to be inactive – probably because they know that the owners don’t usually run regular checks on them. Imagine the shock that these card holders have when their credit card company sends them a statement amounting to thousands of dollars? So yes, it pays to check your credit card balances every now and then.
So, if you’re thinking of replacing your credit cards with new ones to avoid the situations mentioned above, then by all means, go close all your existing credit cards and get new ones. BUT, if you are rooting for a higher credit score, don’t even think of it.
Why do you need to protect your credit score?
Some people are not even aware of what the credit score is. Simply put, it is what lenders look at whenever you apply for a new credit card, or, if circumstances permit, a car or even a new home. A high credit score means you are capable of managing your credit well and are therefore eligible for a higher credit limit, discounts and freebies. On the other hand, a low score implies that you have issues regarding your credit management – much like Rebecca Bloomwood. So, it’s either a secured credit card for you, or none at all.
Remember that this all-important score can be affected by your credit usage, payment history, and the type of card that you wish to drop.
Yes, closing credit cards does have a way of affecting your credit score. First of all, if you do such a thing, you will actually be decreasing your credit limit. Let’s say you have four cards with a $5,000 limit on each. Put all four together and you have a $20,000 credit limit. Closing one of those cards will limit your credit to just $15,000. Consequently, this will affect your credit usage.
What is credit usage and why is it important?
Credit usage measures your total used credit against your total credit limit. To illustrate this more carefully, let’s get back to your four credit cards and assume that each of them has a balance.
Card 1- $ 1,500
Card 2- $ 500
Card 3- $ 2,000
Card 4- $ 1,700
Total Usage: $ 5,700
Your total balance is $5,700, which falls safely within the recommended 30% credit usage for your $20,000 credit limit. But, if you close one of these cards, the percentage of your total balance would rise to 38%, which is above the suggested usage. Not good, considering that your credit usage accounts for 30% of your credit score – so yes, it will hurt. Now, if you have no balance on any of your cards, congratulations! It may decrease your credit limit but not your credit score, so you’re free to close your account.
What other factors will affect your credit score when you close a credit card?
Another reason why closing an old card is not advisable is due to the payment history attached to it, which constitutes 35% of your credit score. Let’s say that the mastercard you have been using for ten years has a glowing record – no payment delays, fees paid faithfully, etc. Closing it will not readily impact your score, since credit bureaus keep records of accounts for about 2-3 years, but it will affect it later. Yes, this history goes down the drain once you cancel that mastercard, and that will decrease your credit score. If you have many credit cards, this may hurt you just a bit, but if you only have two or three, you’ll feel the impact even more.
And yes, the type of account that you are about to cancel matters, too. Generally, credit cards are weightier than department store cards. So if you really want to close a card, you’d better choose the ones from your favorite department stores. But, it also depends on how long you’ve been using that store card. If it has been something like twenty years and your credit cards have been with you for just a year or two – don’t. Plus, of course, is the fact that department stores like Macy’s conduct periodical sales that give you huge discounts when you use their card. This also has a way of upping your credit score.
Closing a credit card does affect your credit score, so here is a recap of the above points:
- If you’re a shopaholic, cut up your cards and start paying them off. If you absolutely can’t resist using them for online purchases after that, then you may need an intervention.
- Call your credit card company and ask for them to waive your annual fee. If they won’t do that, then ask them to downgrade you to a lesser version card with no annual fee. This may be the best option if your existing version doesn’t offer serious perks.
- Check your balances periodically, and if doesn’t stress you out too much, make a purchase now and then to keep your activity current. The downside of this is that you have to remember to pay off your balance on a card that you may not be used to using, but certain banks will automatically close your card if you haven’t shown activity in several months.
- Use Card Watchdog to manage your cards. That way, you can easily set up reminders to call in about your annual fee, and you can stay up to date on your cards’ perks.
- If keeping up with multiple credit cards is too difficult, keep future applications to a minimum and focus on paying on the cards you already have.