Credit card rewards and promotions can be very tempting. We live in a world of instant gratification and a credit card allows us to purchase anything we want right now.
With cash back rewards, airline points, and free bonuses, these are the reasons many of us sign up for multiple cards to earn these benefits. But then you end up having a bunch of credit cards taking up space in your wallet.
What do you do when you no longer need a particular credit card? You can simply call up the credit card company and cancel it whenever you want, right? Wrong.
If you do it incorrectly, canceling a credit card can have a negative impact on your credit score. If you’re planning to cancel a card soon, take a look at these tips so you can preserve your credit score.
Keep Your Oldest Card Active
There are many factors that go into determining your credit score and one of those is length of credit history.
Generally, it’s best to keep your oldest cards open, especially if you have a good payment history on it. Otherwise, closing an old account can shorten your credit history and as a result, lower your credit score.
Understand Credit Utilization Ratio
Another factor you should pay close attention to is your credit utilization ratio. That is your debt-to-credit ratio that measures your overall credit limit with the amount of credit you’re currently using. Closing a credit card with a high limit will reduce that amount of credit you have.
If your amount of debt stays that same, lowering your amount of credit will negatively affect your credit score. When closing a card, aim to keep your credit limit usage low to offset the loss of overall credit.
Know What Fees You’re Paying
When deciding what card to cancel, most people look at the one with the highest interest rate. While that is important, you should also make sure that you understand the fees associated with each card.
Many credit card holders pay an annual fee and don’t even realize it. If you don’t use a card often — or at all — and it comes with a hefty fee, consider canceling it (while considering the tips above). While it may ding your credit score a few points, it will save you from wasting money.
Don’t Close Too Many Cards at Once
When your credit situation gets messy, you may be tempted to close as many cards as possible and start fresh. While that may seem like a good idea, it really isn’t. You want to have a good mix of credit and canceling many cards at once will lessen your credit history along with the amount of credit you have.
No credit can sometimes be even worse than bad credit. Aim to leave at least 2-3 accounts open, active, and in good standing.
The next time you decide to cancel a card, make sure you understand how it affects your credit score. Don’t let one card lower your score, especially if you’re about to make big financial decisions in the near future.
Have you cancelled a credit card before? How did it affect your credit score?