If you’re suffering from credit card overload, you might ask yourself “should I cancel my credit card?” Before you cut up your cards for the sake of a simpler life, pause to consider the effects of cancelling a credit card on your credit score, credit history, and spending habits.
The Pros of Canceling a Credit Card
If you have credit card overload, you might not be keeping a close eye on all your credit card statements. This can make you an easy target for fraud since credit card thieves often start with a small payment to see if it’s blocked before they move in for larger amounts.
Another reason for canceling a credit card is if you are a shopaholic and find it difficult to restrain your spending when you have more credit waiting for you.
Getting rid of a credit card with high annual fees and/or poor benefits can be a good idea too, and it’ll remind you to use the cards that have the best cashback or points programs.
Sometimes, it’s worth it to close a credit card and then reopen it to get a special offer that’s only for new customers (although in that case, you’ll need to check what the rules are about former customers).
The Cons of Canceling
If you’re wondering ‘should I cancel my credit card,’ your biggest worry is probably about the effect on your credit score, which is a real concern.
Lenders are most interested in your balance to limit ratio, meaning the percentage that you use of your total available credit. You might find yourself frequently maxing your other cards once one is gone.
If you have four cards, for example, each with a $10,000 credit limit, closing one of them means reducing your total available credit by 25% to $30,000.
Even if your credit usage of $10,000 doesn’t change, now that you’ve cancelled a card, your balance to limit ratio tips over the 30% recommended by credit bureaus. This lowers your credit score even though your spending hasn’t changed.
Closing a card also impacts your credit history, which starts all over again when you open a new card. If you cancel a credit card that you’ve had for years, eventually that long positive history that you built up will disappear from your credit ratings, and you’ll appear to be a new borrower.
Having a long credit history is essential for getting good terms on loans and mortgages. It can be better to keep your extra credit card in a drawer and just make one purchase per month on it rather than cancelling it entirely.
Should You Cancel Your Credit Card?
As always, only you can answer the question of whether or not you should cancel your card. If you have a short credit history, need the extra credit so that you don’t max out your other cards, or want to maintain a good balance to loan ratio, then cancelling a card will harm your overall financial standing.
On the other hand, if you have a long and positive credit history and carry only a small credit card debt, closing a credit card won’t affect your credit standing in the long term.
Removing the temptation to overspend, cutting down on the psychological stress of juggling multiple cards, and reducing high annual fees might be more important for you.
Credit Card Overload
Credit card overload is real, but it doesn’t have to be dealt with by canceling your credit card. After weighing the pros and cons on the topic of cancelling a credit card, you’ll be able to decide whether closing a card is a sound financial decision for your situation.
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