The annual fee on your credit card may be causing you to consider cancelling the account, or perhaps the benefits offered by your credit card don't fit your needs. Discover why cancelling a credit card will lower your credit score prior to closing an account.
How closing a credit card can affect your credit score
Your credit score might be impacted by two key factors when you close a card. One is your rate of credit utilisation, and the other is the duration of your credit history.
Total credit available is less
To begin with, your credit score is determined by how much of your available credit is actually being used. Your credit utilisation ratio is what is meant by this. Lowering the overall amount of credit you have available results in a greater utilisation ratio for the same level of spending.
Your utilisation ratio, for instance, would be 20% (2,000/10,000=.20) if you had RS.10,000 in total available credit across all of your cards and RS.2,000 in charges. If you cancel a credit card with a RS.3,000 credit limit, your total credit line drops to RS.7,000 instead. Your utilisation ratio has increased to 29 percent for the same RS.2,000 in expenditures. Your credit score could suffer with a greater ratio. The ideal ratio is between.01 and.10, which indicates that you are only utilising 10% or less of your available credit. The average percentage for good marks is at or about 30%. Any score you receive above this could be penalised.
Your accounts will be less than average age.
Your credit score will increase the more credit you have had in the past. The longest-running account you close could have the biggest impact on your score because your score is calculated based on the average age of all your accounts. Less damage will result from closing a fresh account. Always maintain a low debt that may be paid off quickly prior to the due date if you want to preserve your credit score in excellent condition.
When is it appropriate to revoke my credit card?
Closing a credit card account could be a smart move in some circumstances. Sometimes it can help you save money — as with annual fee credit cards — or even indirectly improve your credit by motivating you to spend less.
The card has a high yearly charge.
If you don't use your rewards and your card has a high annual charge, cancelling the account might be worthwhile. Remember that if you proceed, you risk losing the benefits for which you are presently qualified. Ask the card issuer if they may move your account to another card that doesn't charge a fee as an alternative. By doing this, you can maintain your account without paying an annual fee.
Overspending is a problem for you.
Closing your account will motivate you to reduce your spending if you frequently max out your credit cards. If you move your spending to another account, though, you won't save money on that purchase and you still run the risk of damaging your credit score by cancelling the other account.
Your credit card's interest rate is hefty.
It makes sense to refrain from carrying a balance on your card if it has a high interest rate. If you make sure to pay off the balance in full each month or choose not to use the card, you won't need to shut the account to avoid interest.
To avoid interest and maintain the account's open status, be sure to only charge things you can pay for in whole.To prevent the card from being closed by the card issuer, you'll need to use it occasionally, although it only requires a tiny charge once in a while.
You desire a rewards card upgrade.
Ask the issuer to move your account to the new card instead of closing the account you intend to shut in order to upgrade to a different card. Balance transfers often don't result in immediate improvements to your credit score, but getting a new credit card might. Depending on the situation and other aspects of your credit history, this could be an increase or fall in score.
Why should I keep my credit card account open?
Naturally, maintaining credit card accounts makes sense in many situations.
On your credit report, it is the oldest account
Keep previous accounts open as this can help you maintain good credit, which is dependent on how long you've had credit. Maintaining your oldest account open has a favourable impact on your score since it increases if the average age of your accounts is high.
The average age is five years (20/4), for instance, if you have four cards with respective open-times of ten, five, four, and one year. The average age falls to 2.5 years (10/4) if the account that has been open for 10 years is closed.
Unless there is a valid basis for its closure, you should endeavour to keep your oldest account open.
Due to little use, you merely wish to cancel your credit card
If a card is used infrequently, there is often no penalty. Nevertheless, if you never use your card, the issuer might cancel it. It could prevent this from occurring if you use it sometimes. The account should remain open to assist maintain your credit score, even though you don't have to carry the card around with you at all times.
There aren't many open accounts for you elsewhere
It's significant to note that your credit score could be greater depending on the overall amount of credit you have access to.If you just have a few accounts, closing one of them can affect the total amount of credit you have accessible, which would therefore result in a higher credit utilisation rate.
Conclusion
The answer to that query is a little trickier. Technically speaking, cancelling a credit card account has no direct impact on your credit score, thus most scoring models don't deduct points simply for doing so. However, shutting an account can have additional negative consequences on your credit profile as a whole that could lower your score, so it's vital to be aware of these effects before making the final, irreversible decision to close an account.
