How closing a credit card account affects your credit score
Remember the excitement surrounding your first credit card? You probably applied for a credit card when you were in college, or maybe your parents advised you. Either way, you’ve had that card since your teens or early 20s, and it’s probably not the best card in your wallet. It may have a high interest rate, no rewards, or a high annual fee.
Once you start building good credit, you will likely be offered better credit cards. Your interest rates are lower, you likely have no annual fee or a low fee, and you likely have access to airline miles or cash back rewards. So why keep the card that no longer serves you?
How will closing accounts affect my credit?
The important thing to remember is that when you decide to close a credit card account, you lower your loan utilization rate. Remember that credit utilization accounts for 30 percent of the calculation of your total score. You’ll need to cut back on your spending habits when you close a credit card account, or you’ll likely exceed the recommended 30 percent utilization rate, causing your credit score to drop.
The average age of your credit accounts is another important factor in your credit score. That’s twofold. If you have new credit, it’s best to keep the old cards open because they stay on your credit for 10 years. This card, while rarely used, actually helps your credit — especially if you have a good payment history. Closing it can hurt your credit much worse than someone who has been building their credit for over a decade.
What can I do?
If you have a high interest rate or a large annual fee, try negotiating with your credit card provider. Sometimes if you tell them you are considering canceling the card due to high fees etc they may work with you. It costs them a lot more money to acquire a new customer than it would cost them to waive your annual fee or lower your interest rate.
Sometimes you need to close a card. If it’s costing you money because the credit card company won’t negotiate a cancellation or lower annual fee, there’s no point in keeping it. Your credit may suffer, but it will recover. However, you can’t recover funds lost due to annual fees on a card you don’t use.
Closing a credit account should not be taken lightly. Be sure to consider the factors listed above before closing your accounts.
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