Have you been thinking about canceling a credit card, but aren’t sure if you should? While keeping a credit card active has its benefits, there are instances when it may make sense to cancel an account.
How do cardholders decide when to cancel a credit card and when to keep it open? Let’s break down the pros and cons.
Interested in opening a new credit card? Fiona provides competitive offers for consumers all across the credit spectrum.
Potential Benefits of Canceling
There are many reasons why a consumer may want to cancel a credit card. For example, some cards charge annual fees, so a consumer can save money by switching from an annual-fee card (before the fee is due) to a credit card without one.
A consumer may also cancel a card to limit their access to credit, to help them control their spending and better manage their overall debt. One way a consumer can manage their credit debt (on a card they intend to cancel) is to perform a balance transfer to a card with a lower interest rate, which can eliminate the debt from the prior card. Consumers can also make a balance transfer to a card with a 0% introductory APR offer, which will allow them to pay off the transferred debt with no new interest charges over a set period of time.
In addition, some consumers may choose to cancel a credit card because they are upgrading to a better card with more rewards. For example, say a person’s credit score has increased since they got their last card. That could mean they’re now eligible for a card that offers increased benefits, like cash back rewards or a higher credit limit.
Fiona can match you with a new credit card with perks like: no annual fee, balance transfers, or cash back rewards.
Potential Risks of Canceling
While there are potential benefits to canceling a credit card, there can also be risks. Canceling a card can increase a consumer’s credit utilization ratio, which is the percentage of a consumer’s total revolving credit balance compared to their total credit limit. It’s important to keep your credit utilization ratio below 30% for a healthy credit score. By canceling one credit card, you can be increasing your ratio if you have existing balances on other credit card accounts.
In addition, canceling an older account can also have a negative effect, because length of credit history is an important factor in determining a credit score. Having a card and making timely payments for a longer amount of time can boost your score, but the benefit is lost once the account is closed.
Furthermore, if a consumer transfers a balance to a new card to take advantage of a low or zero interest offer (and cancels the older card as a result) they’d be wise to pay off the transferred debt before the promotion period ends, to avoid paying subsequent interest charges and potential fees.
Finally, it is important to be mindful of remaining balances. While it’s possible to cancel a credit card that still has a balance, doing so would require the consumer to pay off the existing debt with potentially higher interest and penalty fees.
For those struggling with bad credit, Fiona can match you with a secured credit card to help you build your score back up.
When it comes to canceling a credit card, there are clearly some potential benefits and risks. While it’s important to weigh all the risks deactivating can cause to your credit score, canceling a card in favor of a new one might be the right choice for some consumers. If you’re interested in a new card, try Fiona to get matched with personalized offers.