The credit cards you start off with may not end up being the credit cards you enjoy using forever. You might find a card with a better rewards program, or one that gives you more travel perks than your starter card that has minimal benefits.
You may be inclined to cancel a credit card that’s no longer desirable to use. But here’s why that could end up being a huge mistake.
When you accidentally damage your credit score
Your credit score is a number that lenders rely on to decide whether you’re qualified to borrow money, and what rates you’re eligible for. The higher your credit score, the more likely you are to get approved for a loan, and the better an interest rate that’s likely to come with it.
That’s why it’s important to keep your credit score in great shape. But unfortunately, canceling a credit card could lower your credit score.
There are a couple of reasons for this. First, your credit utilization ratio is a big factor that goes into calculating your credit score, and it should ideally be kept at 30% or lower. This means that if your total credit limit is $10,000, you’d ideally want to limit your outstanding balances to $3,000.
If you cancel a credit card, it could raise your credit utilization ratio by lowering the limit you’re working with. For example, owing $3,000 on a $10,000 credit limit is fine for your credit score. Closing a credit card with a $4,000 limit and then owing $3,000 on a total credit limit of $6,000 puts you at 50% utilization, which is definitely not optimal.
The length of your credit history goes into calculating your credit score as well. If you cancel a card you’ve had for many years, it could result in a shorter average age for your open accounts. That, too, could cause your credit score to get dinged.
Before you cancel a credit card, do this
Canceling a credit card you no longer use could clearly have negative consequences. So the only reason to cancel a credit card is if it’s charging you an expensive annual fee, but you’re also not getting great use out of it.
You may also be okay to cancel a newer credit card with a small credit limit if doing so won’t have much of an impact on your credit utilization or the average age of your credit history. But if there’s no annual fee attached to that card, it’s not a bad idea to keep it open, just in case.
Rather than cancel an older credit card with a generous spending limit, go through your expenses and identify the smallest recurring bill you have, like a streaming service. Then, put that charge on the credit card you’re inclined to cancel and set it to autopay.
Doing so should keep your account in good standing. And you won’t have to worry about that account going dormant and getting canceled on you.
It’s never a bad idea to chase the best credit card offers out there. For example, if you travel a lot, you can click here for a roundup of the top travel reward cards and see if one of these serves your needs.
But don’t rush to cancel a credit card because its rewards program isn’t the best, or because you’ve replaced it with a better card. Finding a way to keep that account active and in good standing could do your credit score a world of good.