Many consumers have old credit cards that are no longer useful to them for a myriad of reasons. While it may seem intuitive to simply cancel or close these accounts, especially if the cards impose high annual fees or if a rewards program is no longer beneficial, closing an old account may cause more headaches than you intended.
Consumers who are concerned with the health of their credit score in particular should exercise caution before shutting down old credit card accounts.
Impact of Cancelled Credit Cards
There are two critical factors you want to consider before canceling an old credit card:
Your credit utilization ratio is the percentage of your available credit that you are using. For example, if you have a $10,000 credit limit, and you’ve borrowed or spent $2,000 using that credit card, you would be using 20 percent of your credit.
Using a high percentage of your credit, which is usually defined as 30- to 40-percent or more, flags you as a possible high-risk borrower to your creditors. In turn, your creditors may increase your interest rates, and you may notice a drop in your credit score, as your creditors increasingly grow concerned you’re living beyond your means.
Consider the following circumstances. Let’s say you have three credit cards:
- On card #1, you have a $1,000 limit and carry a balance of $250.
- On card #2, you have a $5,000 limit and a balance of $2,000.
- On card #3, you have a limit of $8,000 and a balance of $0.
In this scenario, you have used $2,250 of the $14,000 of available credit, which means that you are utilizing about 16 percent of the credit available to you. Not bad.
But, what if you cancel card number three, with the zero balance and the $8,000 limit? Canceling this card would put you at just over 40 percent utilization, meaning now you’re likely to not only see your credit score drop, but you may also be charged higher interest rates moving forward.
While credit history only makes up 15 percent of your credit score, credit history is a vital part of your credit health. It is also the only factor used to determine your credit score that you can’t do anything to boost; the only thing that improves your credit history score is the passage of time.
If the card you want to cancel is an older card, canceling it will affect your credit history and may result in a lower credit score.
So, what can you do if you have a card that you no longer use but you can’t afford to put your credit health at risk?
Alternatives to Cancelling Credit Cards
There are two alternatives to canceling a credit card that won’t negatively impact your credit. However, both methods require you to call the creditor and request either a fee waiver for the year or downgrading your credit card to one with no annual fee.
In some cases, banks may be amenable to waiving the annual fee for a credit card if you’ve been a loyal customer.
Here’s why: The market for credit cards is competitive. If you’ve been a good customer and have a positive history with the issuer, they may be willing to waive the fee if they learn that they are about to lose you due to a high annual cost.
Getting the fee waived will buy you another year to build history and keep your credit utilization ratio low. The important thing is to examine your history with the card issuer before making your call.
Downgrading a credit card helps you avoid high annual fees without putting another hard inquiry on your credit report. A downgrade is considered a product change and not a new line of credit.
Many rewards cards also have a no-fee version. These cards are not always advertised nor are they even available to be applied for if you don’t already have the high-fee version. Each issuing bank has its own rules about downgrading and continued participation in rewards programs, so be sure to do your research before requesting a downgrade. Make sure your new agreement is in writing!
Downsides to downgrading a credit card may include the potential loss of collected rewards points, ineligibility for sign-up bonuses on the new product, or a reduced rate of point accumulation. However, if the card wasn’t pulling its weight before, such concerns may be negligible in the interest of keeping your credit score healthy.
Collect Your Rewards Points
Cards with high annual fees are usually associated with rewards programs. These are generally for hotels, airlines or online stores. If the card you are downgrading is associated with a rewards program, be sure to either use your points or transfer them before canceling or downgrading.
Even if the rewards program isn’t one you’re into anymore, look into transfer options to a different program before you take action. Additionally, it’s a good rule of thumb to stop using a downgraded rewards card, particularly for travel, as certain trip protections will be lost if you downgrade the card.
Whichever route you choose, be sure to do your homework before calling, so that you know what to request.
If the account that you want to close has no balance or annual fee, consider keeping the account open so that you not only have the available credit on your credit report, but you’ll also keep building your credit history.
Keep in mind, however, that sometimes creditors cancel accounts due to inactivity. Some consumers find it helpful to put a small recurring charge on accounts like these to keep the card active, such as for a subscription or streaming service like Netflix or Hulu, and setting up automatic payment.
If you’re looking to close an account, do so mindfully. Take action to educate yourself on your options, as well as how your credit health may be affected. Once you’ve made any changes to your accounts, be sure to check your credit report to make sure everything is on the report is accurate.