There is a multitude of reasons for canceling a credit card and closing out the account. Everyone’s reason differs, from wanting to change to a lower interest card, a card with no annual fee, getting rid of an un-used card to obtaining a new credit card with a sweet sign up bonus. For other people they started out with a lesser credit card, improved their score enough to obtain a much better card, but are still straddled with the old credit card. For some people, they feel when a new card is obtained that it is the right time to close out an old credit card. Yet there are ramifications that you should consider before you grab the scissors to cut that credit card up with. Several of these ramifications have to deal with your credit score. There is always a proper time to ditch an old credit card, but care should be taken to do it properly, so to as avoid a negative impact on your credit score.
You need to consider how closing out an account can affect your credit score. One of the most common misconceptions is that by closing out your credit card account that any late payments or delinquencies will be removed from your credit report, which is not the case. In fact they will remain on your credit report for a period of 7 years. The opposite is true for your good credit behavior. Federal law mandates that negative credit info be removed after 7 years, but your good credit behavior will stay on your credit report forever. That’s the good news.
You might be curious as to just how closing out an account could harm your credit score and borrowing ability. For starters a huge part of your credit score is your credit utilization. Lets say the card you want to close has a zero balance, but a credit limit of $7500, that’s a good thing, since you have open credit of $7500 that you are not using. Not using available credit in your credit line actually boosts your credit score. Now lets say you close that account out, but you have another credit card with only a $3000 credit limit on it, and you have currently $1500 in charges on it. That means once your old card is cancelled your credit utilization rate will rise to a whooping 50% and your credit score will dip. New credit card accounts also hold less weight than older accounts do on your credit report.
If you have just built up your credit, closing that high interest account could be harmful to your credit score. Your credit report heavily relies on age of account. If your credit report is short, opening a new card and keeping the old card but rarely using it might be the best thing for your credit score. If you close out an account in good standing with a short credit history for the rest of your accounts, your score will take a dive. I would recommend keeping the card open in this case and using it only 2 times per year to keep the account in good standing. If you fail to use it at least twice a year, the credit card company might close the account due to inactivity, which would also hurt your credit score.
So when is a good time to close an old credit card account? Basically if you have a long credit history, and a few open accounts in good standing that have some age to them. This way you have other accounts for your credit report to lean on that are aged and in good standing. The loss of one account in this case should cost you very little in the way of points on your credit score. Make sure you call to cancel the card, and make sure that you have the balance entirely paid off before you decide to cancel. If you have rewards points make sure to use them up before you cancel the account.
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