Is It A Bad Idea To Cancel A Credit Card?

When considering whether to cancel a credit card, it’s important to understand that the impact can vary depending on your spending habits, current credit utilization, and the diversity of your credit profile. If closing a card will significantly increase your credit utilization or diminish the diversity of your credit accounts, it may have a negative impact on your credit and your overall financial situation. On the other hand, if you’re struggling with overspending on your credit card, cancelling it could potentially be helpful. It’s essential to carefully weigh the pros and cons before making a decision. Both scenarios mentioned above could potentially occur simultaneously. At Pachyy, we understand the challenges many Americans face when trying to pay off their credit cards. In fact, according to TransUnion, the average credit card balance for an American consumer in Q2 of 2023 was $5,947.¹ How does your credit card usage compare? If you’re struggling with debt from credit cards, payday loans, title loans, or personal loans, is cancelling a credit card advisable? We’re here to assist you in finding the answers you need. Comprehending credit scores and how your past credit and borrowing habits impact you can be overwhelming at times. However, when it comes to credit cards, the concept is generally straightforward: reducing credit card usage and debt can have a positive effect on your credit score. When deciding whether to cancel a credit card or keep it open, it’s important to weigh the pros and cons. Here’s a helpful list to guide you:

Pros of Closing a Credit Card

• Closing unused credit cards can reduce your spending and overall debt, giving you better financial control.
• By canceling an unused credit card, you can minimize the risk of future fraudulent charges.
• Organizing your finances becomes easier when you close credit cards that you’re not using, making tracking spending and payments more manageable.

Cons of Closing a Credit Card

• When you cancel a credit card, your available credit decreases, which can negatively impact your “credit utilization ratio.” To maintain a healthy credit score, it’s recommended to keep your credit utilization ratio below 30%.
• Retaining a credit card can provide assistance during emergencies, such as unexpected bills or vehicle breakdowns.
• Timely payments made with your credit card contribute to building a positive credit history, although there are alternative ways to build credit aside from credit cards.

If you’re looking to boost your credit score, there are some important things to keep in mind. Your credit score is determined by a few key factors:

Credit Score Factors	Description
Payment History	Shows how consistently you’ve made timely payments for your credit accounts.
Amount/Debts Owed	Represents the total amount you owe across all your credit accounts.
Length of Credit History	Evaluates the duration of your borrowing, the average age of your accounts, and your payment history over time.
New Credit	Takes into account any new or recent loans or credit card accounts you have.
Credit Mix	Considers the variety of credit types in your overall financial profile.

Your credit card utilization ratio, or the percentage of your available credit that you’re actually using, can significantly impact your score. To maintain a low credit utilization ratio, it’s beneficial to keep a credit card with a zero balance open, even if you’re not actively using it. What is a credit utilization ratio when it comes to my credit card, and how does it relate to my overall credit limit? The credit utilization ratio represents the percentage of your available credit limit that you’re currently using. It specifically applies to your credit card. Your credit utilization ratio is an important factor in determining your credit score. How does closing a credit card account impact my credit reports and credit history? Closing a credit card can result in a reduction in the length of your credit history on your credit reports. However, accounts with a history of on-time payments can remain on your credit reports as a part of your credit history for up to 10 years. Will closing a credit card hurt my credit score on my credit report? Yes, closing a credit card can potentially have a negative impact on your credit score, especially if it’s an older account or if it significantly affects your credit utilization ratio. Both your credit utilization ratio and the age of your accounts play a role in determining your credit score. How can I ensure that my credit card account is securely closed to prevent fraud? Once you receive confirmation of the closure, it’s important to shred or securely dispose of the physical card to prevent any potential fraud. What’s the difference between my credit card company and my credit card issuer? While the terms are often used interchangeably, the credit card company generally refers to the brand such as Visa or MasterCard. On the other hand, the credit card issuer is the financial institution that provides the card and sets its terms, such as Bank of America or Chase. If I have multiple credit accounts, how should I decide which credit card to close? When deciding which credit card to close, consider factors such as the age of each account, annual fee amount, interest rates, and benefits. Generally, closing newer accounts with high annual fees might have less impact compared to closing older, established accounts. Are there any fees, like an annual fee, associated with closing a credit card? Usually, there is no fee for closing a credit card. However, make sure to pay off any outstanding balance or transfer it. Additionally, if the card has an annual fee, you might be eligible for a prorated refund. How does closing a credit card affect my overall credit card debt? Closing a credit card does not erase any debt on that card. You will still need to pay off the balance. However, closing the card can prevent further spending on it. Can I reopen a credit card account after closing it with the credit card issuer? Policies regarding reopening closed credit card accounts vary by issuer. Some may allow you to reopen a closed account, while others might require you to apply for a new card. How does the average age of a credit card account influence my decision to close it? Older credit card accounts contribute more to the length of your credit history. As a result, closing older cards might have a more significant impact on your credit score. What’s the difference between canceling a credit card and putting a freeze on my credit report? Canceling a credit card terminates the credit card account, while freezing your credit report restricts access to it, preventing new accounts from being opened in your name. If I cancel a credit card, will it affect my rewards or loyalty points? Depending on the credit card issuer’s policy, you might lose any accumulated rewards or points upon cancellation. It’s essential to redeem them or check the policy before closing the account. Is it better to maintain a zero balance on my credit card or a small balance to improve my credit score? A zero balance is generally better for your credit score. However, maintaining a low utilization ratio (below 30% of your credit limit) can also have a positive impact. How often should I review my credit accounts to decide whether to keep or cancel them? It’s a good practice to review your credit cards annually, considering factors such as fees, interest rates, and your spending habits. How can I communicate with my credit card company or issuer about concerns related to closing a credit card? Most credit card issuers have customer service lines or online portals where you can raise concerns, ask questions, or initiate account changes. If you have a credit card that you’re not using or don’t need, you might think cancelling it is the logical choice. After all, why keep it open if you have no plans to use it? However, it’s important to consider the benefits of leaving it open, as mentioned earlier. If you’re worried that you won’t be able to resist the temptation to use it, then cancelling your credit card may still be a good idea. It could be the right choice for you until you develop better budgeting and spending habits. Here at Pachyy, we recommend keeping these cards open as long as you can use them responsibly. If you want to learn more about spending, budgeting, and credit cards, check out the Pachyy Dojo! References:

1. What’s the Average Amount of Credit Card Debt in the U.S. | U.S. News
2. Credit Card Debt in 2021: Balances Slightly Decline | Experian
3. How are FICO Scores Calculated? | myFICO
4. What is a Credit Utilization Ratio? | Experian