Every now and then, you might come across an old credit card in your wallet, card holder, or bottom drawer, dust it off, and realize you don't really need it. Your inner Marie Kondo kicks in and you think maybe it's time to declutter and cancel all these credit cards you're not using.
Not so fast. Before you cut up that card, here's why you might not want to cancel it right now.
It could impact your credit score
If you're preparing for something financially important — like qualifying for the lowest mortgage rate — don't cancel your credit cards. Doing so could affect your credit score, even if only by a few digits. For example, here are a few instances when I would resist canceling cards:
- Applying for a new mortgage or refinancing an existing one
- Shopping around for the cheapest car insurance
- Looking for the best personal loan
- Applying for a new apartment
All of your credit cards contribute to your credit utilization ratio, which is a measure of how much revolving credit you're using versus how much total credit you have. Credit utilization makes up a whopping 30% of your FICO® Score and might hurt it if your ratio is above 30%.
For example, if you have three cards with $20,000 in total revolving credit, and you're currently holding a $4,000 balance between two cards, then your ratio would be 20%. Now, let's say you cancel one of those cards (the one that has no balance), which had a credit limit of $8,000. Now, your total revolving credit is $12,000, which means you're using about 33% of your total credit.
Canceling a credit card could also affect the age of your credit history, which is about 15% of your FICO® Score. This is especially true if you cancel an old credit card, as that could shorten the life of your credit history. However, as writer Ashley Maready pointed out here at The Ascent, canceling your oldest credit card may not have a serious impact on your score, especially if your credit score is in the exceptional range.
You could lose rewards
When you cancel a credit card, you also forfeit any unredeemed rewards. This can be especially tricky if you have a card that accrues cash back and gives it to you periodically, such as the Costco Anywhere Visa® Card by Citi, which gives you cash back as an annual reward certificate when your February billing statement closes.
You might also forfeit benefits on really great travel cards, such as annual flight vouchers and free checked bags. Many of the best hotel credit cards will also give you free stays on your card's account anniversary, which you would surrender if you canceled the card before that day passed.
If you're considering closing a credit card, I'd take a step back and reconsider. Even if you don't use it, it could be propping up your credit score or holding cash back or rewards. However, if you decide it's best to part ways with your card, first make sure you pay off your balance, redeem all rewards, and update credit card information on your recurring bills (like streaming services). Then, get out the scissors (or pruning shears) and destroy that card.
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