So you’re thinking about cancelling one of your credit cards. Perhaps you want to close out the account because your card has a high rate or maybe you feel that you just have too many credit cards and you’re not using that one account as much. However, before you call up your issuer to cancel that account, you must first consider the pros and cons.
Did you know that cancelling a credit card can badly pull down your credit score? While it might seem like a great move on your part to avoid bad debt, you can end up losing anywhere from 20-40 points from your score and working on improvement may not be that easy. Why does this happen?
There are two reasons why cancelling an account affects your credit score. First, closing one account would cut down your overall credit limit so if you currently have existing balances with your other credit cards, your credit-to-debt ratio can suffer.
It’s important to understand that credit utilization makes up 30% of your total FICO score. Credit utilization is the second largest percentage, next to payment history so if you have a higher amount of debt than your available credit limit, your credit score will be penalized.
Another significant factor in calculating credit scores is length of credit history (10%). The older your credit history is, the stronger your credit score will be. How long have you been using that credit card? If it is one of your oldest accounts, cancelling it now can really cause your credit score to drop. For this reason, you may want to think twice before closing out a credit card.
Options To Consider Before Cancelling
What is the real reason why you want to cancel a card? Is it because of a high interest rate? Did your issuer increase your rate? In this case, you may consider calling up your credit card company and negotiate for reduced APR. If you have been a long time customer with a good payment record, your issuer is most likely to grant your request than to lose you.
You can also avoid paying the interest rate fees by paying off your monthly balance in full each month. Use that credit card for a small amount of purchase so you can be sure to pay off the full balance without problem. Does the card carry expensive fees? Avoid paying the penalty charges by complying with your credit card issuer’s terms and conditions.
But what if you still feel that losing a few points from your credit score would be better than to keep a credit card active? If you strongly believe that the card is not worth keeping any longer, be sure that you have no unpaid balance left in your account. Never cancel a card just to avoid paying charges as this will be extremely bad for your credit score and credit history. You should also make sure that the credit card issuer will put in the remarks that the account has been closed upon the customer’s request to dismiss suspicions that the account may have been cancelled by the issuer.
About the Author
Melanie Mathis is a credit analyst and a writer for 8 years. She has been participating in the programs of http://www.newhorizon.org such as their continuous effort in giving out Free Credit Repair and Building Ebook. NHBS also has a list of recommended Credit Cards for People with Bad Credit