Paying off a credit card is a big accomplishment. To celebrate, you might be planning to cancel your card and wash your hands of it for good. But slow down — there can be negative credit consequences.
Take a look at the Nerds’ analysis below before giving your plastic the ax.
Canceling a credit card can hurt your FICO score
The main reason canceling a credit card is harmful to your FICO score is because it can drive up your credit utilization ratio. Your credit utilization ratio is the amount of credit you have in use on your cards compared with the amount of credit you have available; it heavily influences the 30% of your FICO score determined by amounts owed. It’s best to keep your credit utilization ratio below 30% on all of your cards at all times.
When you cancel a credit card, you’re instantly eliminating a big chunk of available credit. This causes a jump in your credit utilization ratio, which can drag down your FICO score, especially if you’re carrying balances on other cards. Consequently, it’s usually better to keep cards open, particularly if they’re paid in full.
Canceling a credit card could eventually hurt your FICO score for reasons tied to length of credit history, if you’ve had the card for a long time. Although a closed credit card account with positive information will stay on your credit report for up to 10 years, unused accounts don’t have as much influence on your score as current accounts.
In other words, you won’t immediately lose a lot of credit history by closing an old card. But its beneficial effects on your score will wane over time before it ultimately drops off of your credit report altogether. This is another reason it’s smart to keep old credit cards open and active.
Nerd tip: If you’re no longer using your oldest credit card, you can keep it active by using it for a recurring payment. We suggest your gym membership or your Netflix account, but sign up to get monthly text or email alerts from your issuer when a payment is due. It can be easy to forget about an account you don’t use regularly.
Cancel carefully, if you must
FICO scores aside, the Nerds know there may be circumstances where you have to close a card. For example, if a card you’re not using is charging an annual fee, canceling might be the most cost-effective option. Alternatively, if you really can’t control your spending with credit cards, eliminating the temptation is probably best for your long-term financial health.
When you must cancel a card, follow these tips:
- Make sure the card is completely paid off, including any lingering interest or fees.
- Use up or cash out your rewards balance; in most cases, you’ll lose unused rewards if you cancel an account.
- Call your issuer and explain that you need to cancel your account. Be ready for some pushback, and also listen carefully for other options. It might offer an alternative to canceling that you hadn’t considered.
Cards you’ll feel good about holding on to
The best cards to hold on to over the long haul are those that provide high, ongoing rewards and manageable annual fees. Here are a few of the Nerds’ favorite cards if you’re interested in making a long-term commitment:
The Chase Freedom®
In terms of a signup bonus, you’ll Earn a $150 Bonus after you spend $500 on purchases in your first 3 months from account opening. Its annual fee is $0, making it a cost-effective option for years to come.
The Citi®Double Cash Card – 18 month BT offer
Like the Chase Freedom®, the Citi®Double Cash Card – 18 month BT offer charges an annual fee of $0. Its perks make it another great choice for continuing use.
The Capital One® Quicksilver® Cash Rewards Credit Card
The Capital One® Quicksilver® Cash Rewards Credit Card earns 1.5% cash back on all purchases. There’s no limit to the rewards you can earn, and cash back can be redeemed in any amount.
It also comes with a signup bonus: One-time $100 bonus after you spend $500 on purchases within the first 3 months. Like our other picks, its annual fee is $0. It also charges no foreign transaction fees. In short, the Capital One® Quicksilver® Cash Rewards Credit Card is another solid deal for long-term swipers, so keep it on your radar.
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