credit card advice
The decision to slim down on the plastic in your wallet can be made for a number of reasons.
Maybe your card issuer raised your APR or implemented new fees. Maybe the rewards and perks just aren’t there. Or maybe you’ve come to the conclusion that you just don’t need to carry around so many cards.
No matter the reason for closing a credit card, there’s more to think about than simply cutting it into tiny pieces or pushing it through your shredder.
Will My Credit Score Change?
Consider that cancelling a credit card can sometimes have a negative effect on your credit score.
That’s because your score is based in part on factors like total available credit, overall credit utilization and how long you’ve had a card. In fact, your credit score may actually be getting a boost from old and unused cards in your wallet.
If you’re still determined to cut back on the total plastic in your life, however, here are some tips and advice on how to close a credit card without doing damage to your hard-earned credit.
1. Check Your Credit Utilization Rate
Many people don’t realize 30 percent of their credit score is based on their credit utilization rate. This means if the ratio between your total outstanding debt and your total available credit is too high, your credit score will suffer.
If you close a credit card with an available credit limit of, say, $5,000, you’ve just lowered your total available credit by that amount – and potentially sent your utilization ratio into the danger zone.
So before you close a card, calculate what it will do to your credit utilization. You can do this by dividing the total balances on your cards by the total credit available to you. The percentage of your debt to available credit should be less than 30 percent.
2. Check How Long You’ve Owned The Card
Have you heard the saying “Old credit is good credit?” What this means is 15 percent of your credit score is based on the length of time you’ve had a particular credit line.
If you’re looking to close out a card that you’ve had since college, chances are it could also hurt your credit score.
Rather than closing an account that may be helping to boost your score, consider putting that card into a file folder and simply not using it.
Or better yet, consider using the card to pay one of your recurring monthly bills like your Netflix account. If you do this, the account will stay active and you get the benefit of years of good credit.
3. Check Up On Loose Ends
If you have a credit card that is charging high fees or a high annual percentage rate (APR), it may be worth targeting for closure. Be sure that there is no outstanding balance on the card and that it doesn’t have a recurring payment set up on it.
Once you’ve determined that closing a particular credit card isn’t going to damage your credit score, there is more to it than cutting it in half.
Call your credit card company’s customer service number and request closure of your account. Ask them to send a confirmation letter, and be sure to check your credit report after about 60 days to make sure the account shows as closed and paid in full.
4. Check Your Rewards Points & Policy
If a credit card that you are considering closing has rewards points attached to it, closing the account will likely result in a loss of those points. You should consider using the points you’ve earned prior to closing the card or even converting them into cash as a credit on your account.
To do this, you can contact customer service and ask what your options are. If they do allow a credit, you should be able to request a check in that amount when you do close the card.
5. Make Educated Choices
Gaining better control over your spending and finances is always a good move. If that means closing a credit card that you no longer need, then make sure you do it right.
By following the tips and advice above, you’re likely to avoid any damage to your credit score. You may also find slimming down your debt just feels good.
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