What happens when you cancel a credit card?

There are plenty of reasons why a person might want to close an old credit card: you haven’t used it in a long time and don’t want to worry about it, you have too many credit cards and you don’t want to give yourself a chance to overspend or you simply want to get a new credit card to replace your old one. Whatever your reasons may be, it’s important to know that there are some consequences to closing an old credit card.

What happens when you cancel a credit card?

Despite what you might have seen people do in movies, closing an old credit card requires more than just cutting it up with a pair of scissors. You actually need to contact the card issuer before destroying the card and ask them to close your account. Most credit card companies will try to convince you not to close your account, so be prepared.

Once your credit card has been closed by the issuer, this will be reported to all three national credit reporting agencies, this typically happens within one month of you closing the account. If your credit history with the given credit card has been only positive with no negative events, the closed credit card will continue positively impacting your credit score and credit history for up to 10 more years.

Why did my credit score go down after closing a credit card?

In some cases, your credit score might actually go down for a little while after closing an old credit card. This is because FICO credit scores are determined using several factors and closing a credit card affects those factors. Specifically, closing a credit card changes your credit utilization and the length of your credit history.

Credit utilization refers to the amount of debt you have in relation to the total amount of credit you have available. If you have any debt at all, closing a credit card will decrease the amount of credit you have available, therefore increasing your credit utilization, which can negatively impact your credit score, especially if you utilize more than 30% of your credit.

Additionally, when you close a credit card, it will usually decrease the average age of your credit history, especially if you close an account that has been established many years ago. This decrease in the age of your credit history can also cause a temporary drop in your credit score.

Should I close an old credit card?

Closing a credit card can have some negative consequences for your credit score and your eligibility for other credit cards and different types of credit. Ultimately, the choice of whether or not to close your credit card is yours. If your credit score is already not very high and you don’t have a compelling reason to cancel your credit card, you might want to keep it open to avoid lowering your credit score. Alternatively, if you have a significant reason to close a credit card or if you’re comfortable with your credit score taking a small hit, you can simply go ahead and close the card.

 

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