Credit cards have become a very commonly accepted mode of payment and hence an integral part of our lives. It provides convenience and financial flexibility while offering rewards and benefits which otherwise are not available. However, there may come a time when you must cancel a credit card for various reasons. It's natural to wonder how cancelling a credit card impacts your credit score, especially when creditworthiness plays a crucial role in financial matters. In this article, we'll explore the implications of cancelling a credit card and provide answers to some frequently asked questions.
What is the relation between Closing a Credit Card and a Credit Score?
Closing a credit card can have both positive and negative effects on your credit score, depending on various factors.
Here's how it can impact different aspects of your creditworthiness:
Credit Utilization Ratio:
One significant factor that influences your credit score is the credit utilization ratio, which is the percentage of your available credit that you're currently using. When you close a credit card that you use, you reduce the total available credit to you as a sum of multiple credit card limits. This can in turn increase your credit utilization ratio if you have outstanding balances on other credit cards. Higher credit utilization ratios can negatively impact your credit score. However, if you have low balances on your remaining cards or pay off your balances, the impact may be minimal.
Length of Credit History:
The length of your credit history is another essential factor in determining your credit score. Closing a credit card will reduce the average age of your credit accounts, which may have a slight negative impact on your score. If the card you're closing is one of your oldest accounts, the impact may be more significant. However, keep in mind that the impact diminishes over time as new accounts are added to your credit history.
Credit Mix:
Having a diverse mix of credit types, such as credit cards, loans, and mortgages, can positively impact your credit score. Closing a credit card may reduce the variety of credit types in your credit profile, potentially affecting your credit mix. However, the impact on this aspect is usually minor compared to other factors like payment history and credit utilization.
Payment History:
When you close a credit card, your payment history associated with that card remains on your credit report. As long as you've made timely payments on that card, it will continue to have a positive impact on your credit score, even after closing the account.
When Should You Cancel Your Credit Card?
Knowing when to cancel a credit card is essential to ensure that you make the right decision for your financial situation.
Here are a few scenarios in which cancelling a credit card may be a viable option:
- High Annual Fee:
If your credit card comes with a high annual fee that outweighs the benefits you receive from the card, it might be worth considering cancellation. However, before closing the account, explore the possibility of downgrading the card to a version with a lower fee or no fee at all.
- Inactive Card:
If you have a credit card that you no longer use and it's just sitting idle, it may be tempting to cancel it. However, consider keeping it open if it doesn't have an annual fee, as closing it may affect your credit utilization ratio and average account age.
- Excessive Debt or Temptation:
If you find yourself struggling with credit card debt or have difficulty controlling your spending habits, cancelling a credit card can be a proactive step towards financial discipline. By removing the temptation or reducing the number of credit lines, you can regain control of your finances.
How to Close a Credit Card Without Damaging Your Credit Score?
If you've decided to cancel a credit card, follow these steps to minimize any potential negative impact on your credit score:
- Pay Off Balances:
Before closing the card, make sure to pay off any outstanding balances. This ensures that you're not carrying debt from the closed card, which can negatively affect your credit utilization ratio.
- Contact the Card Issuer:
Reach out to the credit card issuer's customer service to inform them of your decision to cancel the card. They will guide you through the process and provide you with the necessary instructions or forms to complete the cancellation.
- Confirm Zero Balance:
After some time has passed since you paid off the balances, verify that the account has a zero balance. Monitor your statements or check your online account to ensure there are no pending charges or fees.
- Send a Written Request:
It's advisable to send a written request to the card issuer, stating your intention to cancel the credit card. Do remember to keep a copy of the letter that you send for your records and follow up if no action is taken by the lender within a period of time. Include your account details, contact information, and a clear statement that you want to close the account.
- Obtain Confirmation:
Request written confirmation from the credit card issuer that the account has been closed. This documentation can be helpful if any discrepancies arise in the future or if you need to prove that you closed the account.
Alternatives to Closing a Credit Card:
If you're hesitant to close a credit card but still want to manage your credit effectively, consider these alternatives:
- Keep the Card Active:
If the card doesn't have an annual fee and you're not tempted to use it unnecessarily, keeping the card active can help maintain a longer credit history and improve your credit utilization ratio. Use it occasionally for small purchases and make timely payments.
- Convert the Card:
Some credit card issuers allow you to convert your existing card into a different type of card offered by the same issuer. For example, you can switch from a premium card with an annual fee to a no-fee or low-fee card. They may offer a version of the card with reduced fees and benefits, allowing you to keep the account open without incurring high costs. This way, you can maintain your credit history and benefits while avoiding the need to cancel.
Conclusion
Cancelling a credit card can have an impact on your credit score, particularly in terms of credit utilization ratio and the average age of your credit accounts. However, the effects are generally minor and can be mitigated by maintaining responsible credit habits. It's important to assess your individual circumstances, consider alternatives to cancelling, and make an informed decision that aligns with your financial goals. By staying proactive and responsible in managing your credit, you can maintain a healthy credit score.
FAQ of Does cancelling a credit card affect my credit score
Q1: Will cancelling a credit card erase its payment history from my credit report?
A: No, cancelling a credit card doesn't remove its payment history from your credit report. The payment history remains on your credit report for up to seven years, positively contributing to your credit score.
Q2: Will cancelling a credit card improve my credit score?
A: Cancelling a credit card doesn't directly improve your credit score. However, it can indirectly help by reducing the risk of overspending and accumulating more debt. By maintaining responsible credit card usage and making timely payments on your remaining credit cards, you can positively impact your credit score over time.
Q3: How long does it take for the cancellation of a credit card to reflect on my credit report?
A: Generally, it takes around 30 to 45 days for the cancellation of a credit card to reflect on your credit report. However, the exact timeline may vary depending on the credit bureau and the reporting practices of your credit card issuer. It's important to monitor your credit report after cancelling a credit card to ensure that it is updated accurately.
Q4: Can cancelling a credit card affect my ability to get new credit?
A: Cancelling a credit card may have a temporary impact on your ability to get new credit. It can affect your credit mix and credit utilization ratio, which lenders consider when evaluating your creditworthiness. However, if you have a strong credit history and maintain responsible credit habits, the impact should be minimal and short-lived.
Q5: How should I decide whether to cancel a credit card or not?
A: When deciding whether to cancel a credit card, consider factors such as annual fees, your ability to manage multiple cards, the impact on your credit utilization ratio, and your overall financial goals. If the card no longer serves your needs and cancelling it won't have a significant negative impact on your credit score, it may be a viable option. However, it's recommended to weigh the pros and cons and, if needed, seek guidance from a financial advisor.