Should You Ever Cancel a Credit Card?
Date: November 9, 2016
You may want to simplify your financial life by closing some of your accounts if you've built up a collection of credit cards. Keeping a credit card open, even if you don't use it, will usually positively impact your credit score. However, in some circumstances, you may have a good reason to cancel a card to help your credit score or your financial peace of mind.
Benefits of Keep Cards
Keeping your credit card open can have several positive impacts on your credit score. First, the average age of your accounts continues to increase the longer you keep your cards.
Second, it positively impacts your credit utilization ratio, which is the amount of money you owe divided by your available credit. If you have three credit cards, each with a $5,000 credit limit, and if you carry a balance of $3,000 on just one of them, you're using 20 percent of your available credit. But your credit utilization goes up to 30 percent if you close one of cards that you're not using because you've reduced your available credit to only $10,000 rather than $15,000.
Close Cards that Cost You Money
Make sure you're getting your money's worth if you're paying to keep a credit card open. Lenders may charge annual fees just for having the card, miscellaneous fees, or very high interest rates on balances. If those costs get you extra perks you actually use, such as cash back, weigh the costs and benefits to figure out if the costs are worth it. If you can find a lower interest rate on another card, consider a balance transfer. Depending on your credit score, you might even qualify for a promotional offer with an even lower interest rate.
Closing Accounts Won't Eliminate Bad History
Don't close a credit card thinking this will erase it from your credit report. Any negative information, such as a late payment, will still impact your score for seven years from the original delinquency, regardless of whether the account is still open. Positive credit information, such as on-time payments, can remain on your credit report indefinitely if the account remains open.
Cons of Too Many Credit Cards
It's possible your credit score could go up slightly when you cancel some cards if you have too many of them. Having extra cards creates a temptation to spend more than you should, and any small ding that results from closing a card is often outweighed by the financial implications of racking up large balances.
Even though your credit score benefits from continuing to keep old credit cards open, you could be at risk for identity theft if you don't keep track of the cards and notice activity that you didn't initiate.