What to Consider Before Closing Your Credit Card Account
What to Consider Before Closing Your Credit Card Account
Before you close your credit card it’s important to think over the decision and consider how it may impact you financially. The truth is that canceling a credit card has the potential to negatively impact your credit score, and we would recommend against putting yourself at risk. If you’re dead set on closing your credit card account, we have compiled information for you with some things to consider so that you can make an informed choice based on what is best for you in your situation.
Closing a credit card can impact your credit utilization ratio
Credit utilization refers to the amount of available credit you’re using based on your credit reports. Considering how your credit is spread before closing your card is very important and here’s why – If you have one card with a balance of $1,500 and a $3,000 limit and another card with a balance of $0 and a $3,000 limit, your credit utilization is 50%. However, if you cancel the card with the $0 balance, your credit utilization jumps to 100% on the first card, which can put you at risk for getting your credit score dinged. Most credit card experts recommend keeping your accounts open for this reason, and we recommend waiting to cancel a credit card until balances on all your cards are $0.
Closing a credit card lowers the average age of your credit history
Have you had the credit card you’re thinking about canceling for a long time? You might want to think again – The length of your credit history, or credit age, accounts for about 15% of your FICO® Score, and closing a credit card will reduce the average age of all your accounts. So, if you have two credit cards, one that was opened 5 years ago and another that was opened 2 years ago, and you cancel the one that was opened 5 years ago, then your credit card age will only show as 2 years on your credit report. Having a longer credit history when you pay your balance is good for credit lenders to see, and you should consider how long the credit card you want to cancel has been open, so you don’t inadvertently shorten your credit history.
A closed credit card will remain on your credit reports
Don’t close your credit card if you’re planning to apply for new credit soon. A closed account will remain on your reports for up 7-10 years and could impact your ability to be approved for new credit in some circumstances. Credit lenders will check your credit when you’re applying for a new account, and a new application will lead to your credit scores being impacted in the short term. Of course, it makes sense to keep credit cards that best fit your needs, but it’s important to be aware of how this could be affecting you in the immediate future and beyond.
There may be certain circumstances such as high annual fees, temptation to spend, and more that could be prompting you to want to close your credit card, and in certain cases closing the account may be a good option for you. FirstCCU is here to talk through questions and concerns you have related to your credit card and what your best options for if you need to close it. We’re happy to assist you.