Do you remember how excited you were when you got your first credit card? You probably applied for a credit card when you went to college, or perhaps your parents advised you. In any case, you’ve had that card since you were in your teens or early twenties, and it’s probably not the best card in your wallet. It could have a high-interest rate, no benefits, or a significant yearly cost.
You were probably offered better credit cards as you started earning decent credit. Your interest rates are lower, you presumably have no or a modest annual fee, and you probably have access to airline miles or cash back benefits. So, why maintain a card that is no longer useful?
How will the account closures affect my credit?
The crucial thing to remember is that when you close a credit card account, you are lowering your credit utilisation rate. Keep in mind that credit utilisation factors for 30% of your entire score computation. When you terminate a credit card account, you must reduce your spending habits or you will likely exceed the acceptable 30 per cent use rate, causing your credit score to plummet.
Another crucial aspect of your credit score is the average age of your credit accounts. This has two implications. If you’re new to credit, leave old cards open because they stay on your credit for 10 years. Even if you rarely use it, that card can benefit your credit, especially if you have a strong payment history. Closing it may have a considerably greater negative impact on your credit than someone who has been building credit for more than a decade.
So, what should I do?
Try haggling with your credit card provider if you have a high-interest rate or a significant annual fee. If you inform them you’re thinking of cancelling the card owing to hefty fees, etc., they may be willing to work with you. It is significantly more expensive for them to recruit a new customer than it is to remove your annual fee or cut your interest rate.
You must sometimes close a card. It doesn’t make sense to maintain it if it’s costing you money because the credit card company won’t negotiate a waived or reduced annual charge. Your credit score may suffer, but it will rebound. You cannot, however, recoup monies lost owing to yearly fees for a card that you do not use.
Credit account closure should not be handled lightly. Before closing your accounts, keep the points outlined above in mind.