How Closing a Credit Card Account Affects Your Credit Score

Do you remember the excitement surrounding your first credit card? You probably applied for a credit card when you went to college or maybe your parents gave you some advice. Either way, you’ve had that card since your teens or early 20s and it probably isn’t the best card in your wallet. It may have a high interest rate, no rewards, or a high annual fee.

Once you started building good credit, you were probably offered better credit cards. Your interest rates are lower, you probably don’t have an annual fee or a low fee, and you probably have access to airline miles or cash back rewards. So why keep the card that no longer serves you?

How does closing the accounts affect my credit?

The most important thing to remember is that when you make the decision to close a credit card account, you are reducing your credit utilization rate. Remember that using credit accounts for 30 percent of your total score calculation. You must reduce your spending habits when closing a credit card account or you will likely exceed the recommended 30 percent utilization rate, causing your credit score to take a nosedive.

The average age of your credit accounts is another important factor for your credit score. This is twofold. If you are newer with credit, it is best to keep old cards open as they will remain in your credit for 10 years. That card, while rarely used, really helps your credit — especially if you have a good payment history. Closing it can hurt your credit much worse than someone who has been building their credit for over a decade.

So what can I do?

If you have a high interest rate or high annual fee, try negotiating with your credit card company. Sometimes, if you tell them that you are considering canceling the card due to high fees, etc., they may work with you. It costs them a lot more money to acquire a new customer than it would cost them to waive your annual fee or lower your interest rate.

Sometimes you have to close a card. If it’s costing you money because the credit card company isn’t negotiating a waived or lower annual fee, there’s no point in keeping it. Your credit may take a hit, but it will recover. However, you can’t recover lost money because of annual fees for a card you don’t use.

Closing a credit account should not be taken lightly. Make sure to consider the factors mentioned above before closing your accounts.

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