Here's Why You Shouldn't Close that Credit Card Account

You probably opened your first credit card in college to get that trendy designer bag everyone was flaunting around. You might not see the need for that credit card now. Not only that, but you are even thinking about canceling it, but is it a wise idea? Well, you might believe deleting as many accounts as possible is a good thing. But did you know canceling the credit cards, particularly the old ones, can also impact your credit score? 

Here is how canceling your credit card will affect you:

Overall credit utilization may increase

Your credit utilization simply means the percentage of the credit limit you use. For instance, if you have a credit limit of $3000 and can only spend $1500 of it, your credit utilization is 50%. However, if you cancel your credit card and your limit drops to $2500, you will have used 75% of it. An elevated utilization rate indicates to lenders that you're using a significant portion of your total credit limit, which may be a sign of risk. Therefore, lenders would love to see you maintaining a credit utilization below 25 percent. Lenders also consider the limits available to you when evaluating whether to approve you for a loan.

Your credit score will decline.

You must realize that you do not have a single universal score. During credit applications, each lender will give you a score. The length of time your oldest credit line has been open is crucial when evaluating your credit score. It demonstrates that you have a good credit history. Also, the ratio of how much you owe to how much available credit you have accounts for a significant portion of your score. For instance, if you have a total credit limit of $30,000 but owe $2000, you are in a suitable position. Closing the credit card may decline your credit limit, which may not be good for your credit score. For this reason, you must understand how much canceling a credit card may affect your credit score.

When To Cancel Your Credit Card

It may be wise to cancel unused credit cards. For example, when the annual fee is no longer justified, if the yearly charge isn't worth the benefits of having an open account, or if the credit card has high-interest rates, you may find a need to cancel the credit card.

Also, reconsider being a credit card holder if the convenience of swiping a card pushes your spending habits out of control. Finally, cut ties with your credit card if it gives you extreme financial stress.

Make sure you pay off any balances or transfer the debt to a balance transfer card before closing a credit card to take advantage of an introductory interest-free period.

It is vital to keep your credit cards active, especially the old ones. Maintaining a long-term, well-managed credit account can help you boost your credit score. In addition, this demonstrates that you've been a dependable borrower in the past, which may indicate that you'll repay other lenders as well. To learn more, please reach out now!