Closing out credit cards that you don’t use anymore might seem like a good idea at first glance, but if you’re considering closing a credit card, there are some things you may want to consider before making that call to your creditor.
It may seem as if closing credit cards would be a good thing in terms of your credit report. After all, the less credit you have available, the less of a risk you are for a large default, right? Unfortunately, the credit card reporting agencies don’t see it that way. In terms of your credit score, closing a credit card account can actually hurt your credit score. Here are some things you should know before you close a credit card that will help ensure that closing a credit card will have the least overall impact on your credit rating.
Your credit score is based in part on your credit utilization rate
What is a credit utilization rate? It’s the percentage of credit that you have available compared to your credit card balances. So, for instance, if you have a credit card with a $10,000 limit, and you owe a $9,000 balance on that card, your credit utilization rate is 90%.
In the world of credit reporting, the lower your credit utilization rate, the better. For that reason, closing a credit card that you no longer use can hurt your credit score because you will have inadvertently risen your credit utilization rate by reducing the amount of credit you have available to use vs. how much credit you are currently utilizing. In order to minimize the impact on your credit utilization rate, you may want to consider paying down other credit cards before closing a card you no longer use.
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Your credit score is also based on the average age of credit accounts
Credit scores go higher if you have a longer history of open credit card accounts. If the credit accounts you have are newer, your average age of credit accounts is lower, and this can affect your credit score. Therefore, it’s important when considering closing a credit card that you don’t close a card that you’ve had for many years – unless you’ve got other credit accounts that are also several years old. By keeping older accounts open, you can help ensure that closing a credit card will have less impact on your credit score because you’ve ensured that closing a card won’t affect your “average age of accounts” factor.
A lower credit score can affect future interest rates
If you close credit card accounts without careful consideration and planning for the impact it can have on your credit score, you could be subjecting yourself to higher interest rate loans later on down the line. For instance, it might be a good idea to hold off closing a credit card account if you’ll be applying for a mortgage loan or car loan in the near future. Since closing a credit card can result in a lower credit score, you could be stuck with a higher mortgage interest rate or car loan rate if you close a credit card in the months before applying for these types of loans.
If you’re still insistent on closing out one or more of your credit cards, here are some points you may want to consider as you decide which cards to close out and which cards to keep open:
- Close cards that have the least financial benefit to you. If you have a card that carries a high interest rate or annual fee, consider closing that card first.
- Close cards one at a time. Close one card, and then wait six months before closing another
- Close newer cards first if possible and if it makes sense financially. Don’t close a card with a terrific interest rate just because it’s newer, but if you’re choosing between two cards with similar interest rates, close the newest one as opposed to the older one so as to minimize impact on your “average age of accounts” factor.
If you do choose to close some of your credit card accounts, be sure to close them properly by sending a written, signed letter to the credit card company and then by cutting up the card as well. Also, monitor your credit report in the months following the closing of the card to be sure that the account was closed and to check to see what – if any – impact the closing had on your credit score.
Closing credit card accounts can hinder your credit score, but by understanding credit reporting guidelines and by following the tips above, you can be sure that closing a credit card account can affect your credit score as minimally as possible.
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