A credit card is useful everywhere. All processes that provide debt relief ask for credit scores. There are many companies that provide credit card debt consolidation in New York. The same goes for the best credit card debt settlement. Both of these procedure needs a credit card and credit score to offer you a better deal. However, there are situations where a person wants to cancel his/her card. But does cancel a card have any effect? If it does, whom it affects, and how much?
Think Before You Close a Credit Card
Canceling your credit card may have many reasons. Maybe the annual fee of your bank charges is more and you do not want to pay that anymore. You may have the option of upgrading or shifting to a new card with better offers. However, closing a credit card has its own demerits. It can hurt your credit score. In the article below we have listed how does closing a credit card affects your credit score.
Closing a credit card can affect your credit score for the below reasons:
High utilization ratio
The first thing that you lose when you close your credit card is the availability of a credit limit on that card. Losing your credit limit makes your credit utilization ratio high. A high credit utilization ratio is not good for you. It depicts the risk. Lenders usually want a credit utilization ratio under 30. You can calculate your credit utilization ratio by dividing the sum of the balance of your all credit cards by the sum of all credit limits.
Lowers the average age of accounts
The age of your account helps in building a credit score. More the age, the better is the credit score. In this regard, if the account that you are going to close is an old account then it will affect your credit score negatively. It lowers the average age of your accounts which lowers the credit score. Especially closing old accounts that have missed payments with them remain on your credit report for seven years and can affect your credit score badly.
A credit score is used in many places like taking a mortgage, auto loan, etc. Therefore, if you are planning to take any financial step that will depend on your credit score, then try not to cancel your credit card.
When Canceling a Credit Card Makes Sense?
Canceling your credit card makes sense when
1. Annual fee of your credit card is high.
2. Its rewards are not worth the fee that you pay.
3. You do not need a credit card frequently.
4. You are in debt but still spend unnecessarily.
When canceling a credit card do not make sense
1. If it is the oldest account, try not to cancel it. As said above, canceling an old account will definitely affect your credit score. Not only credit score but it will also affect the credit utilization ratio.
2. You do not have many open credit accounts. If you do not have many accounts, then closing a single account will make it difficult for you in the future to get a new credit card or any financial assistance that uses a credit card or credit score.
3. You are in a situation where you know that you may need credit card debt settlement any time or any other financial procedure that may require a credit score.
What you can do instead of canceling the credit card
Instead of canceling the credit card, below are few tips that you can use to solve problems because of which you are thinking of canceling your credit card.
1. Call your customer care service and tell them your problem. Ask them if they can lower or waive off the annual fee for a year or two that you think is very high. Most companies do that so that they can retain customers. especially, if you are an old and regular customer.
2. To stop overspending, you can pause your account. Pausing your card means even you cannot use your credit card for that period. More information about it can be taken from customer care service.
Another thing that you can do to stop overspending is to stash the card somewhere secure. Try to follow self-discipline or take the help of someone else who can keep your card secure.
Closing a card is a personal choice. However, there should be a reasonable reason behind that choice. Especially if you are thinking about closing an old account. High annual fee or overspending, every problem has a solution other than closing your account. While closing the card, remember that it will affect your credit score. Affecting your credit score is the biggest demerit that closing a card has. A credit score affects your chance of getting a loan, credit card debt settlement, or debt consolidation. Therefore, keep the above-mentioned points in mind before closing a credit card.