If you don't want to use your credit card, what should you do? You might assume that that canceling the card is the best option, but you should be careful. Closing a credit card is not always a good idea. Many people don't realize that canceling a credit card can hurt their credit score.
A current Bankrate survey found that 29% of Americans do not know that whether closing a credit card will hurt their credit score, 15% people think that it has no effect on credit score and 13% incorrectly think that it will increase their credit score.
There are many reasons to close a credit card, on the other hand, there are also many reasons to keep it active.
HOW CANCELING A CREDIT CARD HURTS YOUR CREDIT SCORE:
There are many ways in which canceling aa credit card can hurt your credit score and in most cases, your credit score will take multiple hits.
These are some of the ways in which your credit score might be affected:
AGE OF CREDIT:
Canceling a card can shorten your overall credit history as depicted on your credit report, and accounts that have been open for multiple years are likely to deliver the biggest negative impact.
CREDIT UTILIZATION RATIO:
When you will close a card, you will have less credit available to you. This decrease in credit available can negatively impact your credit utilization ratio by raising it.
It can also impact. Your credit mix is the assortment of different types of credit you have, like credit cards, car loans, student loans and mortgages. If you only have two cards, for example, closing one of them will result in a much less robust credit mix, especially if you do not have additional financial obligations like a car, student loan and a mortgage.
Payment history on a closed account stays on your credit report which means a good payment history will continue to help your score, on the other hand, negative payment history will continue to hurt it.
Payment history on your credit obligations accounts for 35% of your credit score.
WHEN YOU SHOULD CANCEL A CREDIT CARD?
There are many situations in which canceling a credit card makes sense. If you have a rewards credit card with an annual fee, for example, you might decide that you are not earning enough rewards to justify the annual cost of the card. In that case, it might be a good idea to cancel the credit card and switch to a no-annual-fee card.
ALTERNATIVES TO CANCELING A CREDIT CARD:
TRANSFER YOUR BALANCE TO A NEW CARD:
If you have an outstanding balance on the high-interest rate card, use a balance transfer credit card to transfer your balance and pay it off during an interest-free grace period.
UPGRADE OR DOWNGRADE TO ANOTHER CREDIT CARD:
If you are thinking about canceling a credit card because you want to trade up to a sibling card that offers better rewards, which offers 1.25 miles per dollar on every purchase, contact your card issuer and ask for an upgrade.
USE CARD FOR A SMALL SUBSCRIPTION PAYMENT:
Lastly, remember that you don't need to cancel your old credit cards just because you'd rather put the majority of your spending on a new credit card. Put your spending on the credit card you want, and keep your other credit cards active so that they continue to benefit your credit history and credit score.
THE BOTTOM LINE:
Most of the people think that they cancel old credit cards when they are no longer interested in using them, closing a credit card is generally a bad idea. It's better for your credit score to keep old credit cards open for as long as possible unless those cards are charging annual fees that you'd rather not pay.
Keep old credit accounts active by charging small purchases to each credit card every month and paying them off in full every time.