October 30, 2018

reason for canceling a credit card account

Sometimes there's good reason for canceling a credit card account. Maybe that card has a high annual fee, or you've just gotten a divorce and want to close down joint accounts.

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If not, you need to consider the consequences of closing that account because it could have a negative impact on your credit score. That’s because canceling that card will negatively impact your "credit utilization” – the amount of credit you’re using divided by the credit you have available to you.

"Credit utilization is the second most important factor in a credit score. That's why you want to keep as many accounts open and in good standing as possible,” said Ted Rossman, an industry analyst at creditcards.com.

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Cancel a credit card and your available credit instantly gets smaller, which drives up your credit utilization

"Lenders don't want to see you bumping up against your credit limit. Ideally, they want to see that you’re keeping your credit utilization below about 30 percent,” Rossman told me.

A better move would be to just leave the account open, but not use the card.

"Just put it in a drawer, put it in the freezer, keep that line of credit open because it's really going to help your score,” Rossman said.

If the card has an annual fee, and you're not using it, you might want to see if you can downgrade to another card with that same issuer, maybe a fee-free card.

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"It might not have as good perks, but it's going to keep that line of credit open,” Rossman said.

 

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