Finance Globe

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What's the Risk in Closing a Credit Card?

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You may think nothing of closing a credit card you no longer want. Maybe you have too many cards or you have one that doesn't pay any rewards. because you have too many cards or that one doesn't pay any good rewards - you may think nothing of simply closing out the card. That way you don't have to deal with it anymore. However, closing a credit card may have some unintended consequences.

Potential Impact to Your Credit Score

In some cases, closing a credit card can have a negative impact on your credit score. This can happen especially if you close a credit card that still has a balance. Your credit utilization will shoot up because the available credit is no longer included in the ratio.

Closing a credit card with a zero balance could also affect you credit score, even though the card is completely paid off. Your credit score considers your utilization on each credit card and across all your credit cards. If you have balances on some credit cards and close a credit card that's unused, your total credit utilization will go up. Your credit utilization is updated each month based on your most recent credit activity so you can regain points as you pay down your credit card balances. Reducing your balances faster will help your credit score recover sooner.

You'll probably lose any credit card rewards you haven't redeemed if you close your credit card first. Before you close your account, see how you can use your rewards for a statement credit, for example. Or, you may be able to transfer some rewards to another loyalty partner, so it's not a complete wash.

You won't have access to any of the credit card benefits. Some credit cards have perks beyond the rewards offered on the card. Your card may come with rental car coverage, access to concierge services, extended warranty, purchase protection, or several other benefits. It may be worth keeping a seldom-used credit card around if none of your other credit cards offer those premium benefits.

Keeping your oldest credit card open can boost your credit score, no matter what. A portion of your credit score - 15% to be exact - is based on the amount of experience you have using credit. Closing the oldest credit card will eventually remove some of your experience. The card will stay on your credit report for a few years, but eventually the credit bureaus will stop reporting on a closed account. You lose the benefit of decades of credit experience.

When Can You Close a Credit Card

It might make sense to close a credit card you never use if you're being charged an annual fee on that card. It's also safe to close a credit card that's already paid off, but isn't your first credit card as long as your other credit cards are paid off too.

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Friday, 18 October 2019

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