Is it a smart idea to cancel credit card accounts that you are not going to use? Why have credit cards that you are not going to use? Doesn’t it make sense to close the account so that this history will disappear from your credit report?
It is a common misconception that canceling a credit card will increase ones credit score. If you cancel a credit card account you can expect to take a small hit to your credit score in the short term although the long term affects can sometimes be favorable.
First of all, credit history disappears only after seven years, not just because you close an account. That said, there are some advantages that can come from closing a credit card account.
In a nutshell, you should keep your credit card accounts open because canceling a card will erase that card from your credit history and decrease your credit utilization scores which will both in turn decrease your credit score.
Let’s take a look at some of the pros and cons of closing a credit card account to investigate this issue further.
Advantages to Closing an Account
If you close unused credit card accounts then you can slightly increase your credit score although in most cases you will actually decrease your credit score. The reason is that you will have less available credit, and thus are protected against the threat of “over-indebtedness.” Simply put, you won’t have the extra credit to spend and thus become less of a risk to the company. Another significant advantage is re-eligibility. You probably won’t get anything special for staying with the same credit card company year after year. However, there’s no question that the best deals are extended to new cardholders. Prospective new cardholders need extra incentive to sign a new contract. If you cancel your account and then wait 18 months or so you can usually get a better deal from the same company—not to mention dozens of other card issuers.
Cutting up your card and not spending any more credit is not the same thing as canceling an account. In order to officially cancel an account and to have your credit report reflect that decision, you must call the credit card company and inform them of your choice to cancel the account. You can also make this request in writing.
There is a possibility that the credit card company will offer you extra incentives to stop you from canceling the account. This isn’t a sure-thing but it has happened for some borrowers. Before agreeing to such a deal, research other credit card offers and make sure you are getting the best savings. Lastly, double check to make sure your card is closed in a couple of months, as the company may give you a brief waiting period and then forget to make the closing official.
Disadvantages to Closing an Account
However, closing your accounts is not always beneficial. Many financial experts even consider this move a mistake in many circumstances. This is partially because many people are misunderstanding the idea behind closing an account. If you have three different credit cards with a $500 limit each, and you then close one credit card, that’s $500 dollars less credit you have at your disposal. This means your credit utilization rations will be impacted unfavorably. On the other hand, if you have one credit card and then close that account, then you haven’t done yourself any favors. You have lost what credit you have.
You have to consider credit utilization. If you significantly reduce your utilization rate then you lose points on your credit score. For example, if with one card you carry a balance of $1,000 and have $1,500 total credit then you have an unfavorable credit utilization percentage. However, if you have another credit card with a $0 balance and $500 worth of credit, then your utilization percentage is actually better, because you have more combined credit to spend, and thus are considered in less debt.
Striking a balance is the key here. Do not open more credit cards just for the sake of inflating your creditworthiness. Doing this will only result in shrinking your credit score. (Even applying for a new credit loan slightly reduces your score) An alternative to tampering with your solid credit score is to let the company close the account automatically. This will work to your advantage, as the company will only do this when you become a liability to their profit.
Good Ideas and Bad Ideas in Credit
Let’s consider some of the circumstances in which it would be a bad idea to close your credit card account. If your card still has a balance and you close the account then you have basically maxed out your credit card and injured your credit score. If you close the only credit card in your possession that has available credit, you are significantly hurting your utilization percentage. Closing your only credit card is also a poor decision, considering that you now have no credit. Closing your oldest credit card account might also be a bad move. If you close your oldest account and keep your newest account you are actually discounting your years of experience with the first company. New lenders may think of you as a greater risk than you really are because of your lack of established credit. Naturally, you wouldn’t cancel a credit card that has favorable terms, as these might be hard to find again.
Here are some reasons why it might be a good idea to close your credit account. If you are often the victim of “impulse buying” and tend to spend a lot of money that you don’t have, then closing a credit account is a shrewd move. If you have a card that is inactive (but several other accounts that are current) then closing your card might not be a bad move. Some people will go out of their way to close an inactive account in order to protect themselves from identity theft.
If you have high interest rates on a card and do not intend to use it again (and have other accounts still open) then closing the account would be prudent. Which brings us to the question: what if your old account was marred by high interest charges? The solution lies in searching for a new and superior credit card contract online. If you don’t have time to individually search for a better deal then use our free credit card comparison tool. This web tool allows you to compare all of the major credit card company offers at the same time. Start saving on interest today using this chaser tool!
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