It may be so tempting to want to jump on every enticing credit card offer that comes your way (hello thousands of rewards and repurchase agreements!). But before signing up, it's worth taking a moment to think about your long-term plans for that particular credit card, and how cancellation of a card later affect your credit score.
In a 2019 Bankrate survey, 61% of US credit cardholders said they had canceled at least one credit card, but only 42% knew that it usually hurt credit score.
"Knowledge is power," says Priya Malani, founder of Stash Wealth, a millennium-focused financial planning firm. "Knowing that canceling a credit card can damage your credit score is important to understand so you can make informed decisions and come up with a plan to fix the damage in advance, rather than panic."
While Malani says closing a credit card is not always a bad thing, she adds that "it's nice to understand how your score will be affected so you won't be staggered."
There may be a number of reasons why you might want to cancel a credit card. Maybe you are tired of paying a high annual fee or you will limit your options to exceed. However, before you pick up the phone to do your breakdown service, there are six questions you should ask yourself to make sure that you do not damage your credit score.
first Is the credit limit on this card helping my credit usage?
Your credit utilization rate (CUR) is an important factor in determining your overall credit score.
It is calculated by taking the amount you spend and dividing it by the amount you have available across all your cards. Generally, experts recommend spending 30% or less of the total credit you have available across all cards at any time. So if you have a credit limit of $ 1
"By closing a credit card account, the consumer takes some of their available credit from the table." says Tommy Lee, a principal researcher at FICO. If your expenses are not changed but you have less credit available, your credit score can get a hit because you use more of your available credit.
If you can't keep below the 30% benchmark, Malani suggests calling your credit card company and asking them to increase your spending limit.
If you go this route, she warns you to do so with caution. "A higher limit does not mean you have to charge more on your card," Malani says. "Remember, never put anything on your credit card that you can't pay in full when the statement becomes due, otherwise you use your credit card to live a lifestyle you can't afford."
2nd When did I activate the credit card I am considering closing?
Your credit history is another big piece of your credit score. It is the average time that all your credit cards have been active. In the eyes of lenders, a longer credit history is generally better because it shows financial liability overtime. This is one of the reasons why experts advise against closing credit cards, especially older ones, as it may shorten your average credit history.
Ulzheimer claims that this mindset is a myth because your credit history is not immediately affected when you close a credit card. It is the credit unions policy to leave any closed cards on your credit report for 10 years after termination. As long as they come up on the report, they are calculated in your average credit history age.
Even with the 10-year grace period, Ulzheimer says he will never recommend you to close your oldest card because you will always have the value of its age on your credit report. .
3rd Do you have access to high credit card limits that tempt me to exceed?
For some people, credit cards with generous expense limits can earn some serious temptation to exceed. However, unless your spending habits become a real problem, consider other ways to control how you use the card before canceling a credit card.
"Closing a card simply because you don't trust yourself is not a good idea," Malani says. "As an adult you will have a strong credit score and having a credit card (or two or three) open and in good condition is a good way to achieve it."
Her advice? Instead of canceling your card, remove it from your wallet and hold it in a drawer. In this way, your card is out of sight, out of mind. It is also important to remove it from Apple Pay and any online retailer where you may have stored your info for easy purchase.
Ulzheimer claims that overuse is a legitimate cause of cancellation. "If you can't control your expenses, it's a good idea to close the card," he says. "But you should at least be aware that you may end up with a lower credit score as a result."
If you are in a position where you need professional help in setting your spending habits, there are services available to you. Debtors Anonymous is a support program designed to help people cease incurring unsecured debt. To find out if it's for you, read about the 12-step program or visit the organization's free literature site topic.
Another useful resource is the Financial Counseling Association of America (FCAA), which is a national association representing credit counseling companies. It is a good starting point if you are looking for a credit counselor.
4th Is the card I am considering closing a store credit card?
When it comes to storing credit cards, Malani and her team at Stash Wealth recommend that you avoid them altogether. "It all comes down to human psychology," Malani says.
Studies have shown that customers with store cards end up spending more in the store than they would if they did not have the store card. This she says when you want to get an appointment, such as. Free shipping because you are a VIP member. You think you save money even if you spend more.
"We almost never recommend opening a store card unless you make a big purchase, such as buying a piece of furniture, in which case the upfront promo provides a significant cash benefit," Malani says.
She adds that since the store card has generally low credit limits and higher than average interest rates, it is best to use the store card only to get the original discount you are looking for and close it as soon as you pay it.
5th Do I have too many open credit cards?
Although the number of credit cards is too many, there is less on the number of cards you have and more on how to manage them.
"In most credit score calculations, the bulk of your credit score has to do with accountability," Malani says. "So make sure you pay your bills on time and in full."
If you feel your cards have become too large to clear before closing them, consider coming up with a strategy to be organized.
"Set reminders, specify autopay," says Malani. "Do what you need to do to demonstrate accountability."
6th Do I have a goal to increase my credit score in the near future?
Considering the many milestones that require you to have good credit, it is important that you consider where you are, with your personal and financial goals before canceling a credit card.
"If you have a good credit score and you plan to apply for a mortgage, car lease or even rent an apartment, you would not want to cancel a card because it is likely to make your score," Malani says.  If you are in a situation where you have already canceled a credit card and your credit score has suffered, or you want to increase your score overall, there are simple ways to do that by paying your bills in full and on time. Maintenance a CUR of less than 30% and regular review of your credit report for errors.
While Ulzheimer says there is "no carpet advice for everyone," it is important to keep these general best practices in mind if you want your score improved. He adds that "it will take some time for your score to recover," which means patience and consistency is key when working to increase your score.
"If your scores are lower because of credit card debt, then you have to work to pay it," says Ulzheimer. "And surely your scores can be low because of a combination of things like missing payments and too much credit card debt. They are the hardest to raise because you really have to change everything about how you manage your credit."
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