needs Kasheesh
You might no longer use your oldest credit card, but before you decide to close it, it’s crucial to understand the potential consequences on your credit score.
If you got your first credit card in college in exchange for some freebie or signed up at your family’s bank, it might seem pointless to keep it. However, experts advise against closing a credit card, due to its potential negative impact on your credit score. Before you make a decision, consider the possible effects.
Impact of closing a credit card on your credit score
Closing a credit card will generally lead to a drop in your credit score, at least for a few months, if not longer. The main reason is that it reduces your available credit limit, increasing your credit utilization ratio. When you close an account, you lose the credit limit tied to that card, which raises your overall utilization rate, or the percentage of your available credit in use.
A higher utilization rate signals risk to lenders as it shows you are using a significant portion of your available credit. Experts usually recommend keeping your utilization rate around 30%, but the lower, the better. The rise in your utilization rate is the most critical factor to weigh when deciding whether to close an account. To keep your credit utilization rate low across all cards, it's best to spread out purchases between your different credit cards.
Another reason experts advise against closing your oldest card is that it decreases the average age of your accounts. While this factor is less significant than your utilization rate, it still matters. If you have a well-established credit history, and if you are implementing healthy credit habits, the impact of closing an older account will generally be balanced out by your remaining accounts over time.
Reasons you might want to close a card and what to do instead
1. You’re paying an annual fee that no longer justifies the cost
Instead of closing a credit card, you might consider downgrading to a no-fee version offered by the same issuer. This strategy helps preserve your credit history and prevents the negative effects on your credit score that come from closing an account.
Downgrading a card means switching from one with an annual fee or premium perks to a no-fee card. This is especially useful for those who don’t find the benefits worth the annual cost but want to keep their account's longevity and credit limit intact.
2. Your card has a high interest rate
If your card has a high interest rate and you’re carrying debt, try contacting the issuer to request a lower rate. With a solid payment history and timely minimum payments, your card issuer may agree to lower your rate. It’s always worth asking.
Check potential impacts on your credit score
To understand how closing a credit card might affect your credit score, use online simulators like CreditWise from Capital One. These tools can show how actions such as closing a credit card or paying down debt could impact your score. Keep in mind that the exact effect on your credit score can vary.
Conclusion
While it might be tempting to close an old credit card you no longer use, it's important to consider the potential impact on your credit score. The increase in your credit utilization rate and the decrease in the average age of your accounts can negatively affect your score. Instead, consider alternatives like downgrading to a no-fee card or negotiating a lower interest rate. Always evaluate how such decisions will impact your financial health before taking action.
