Questions to Ask Before You Close That Credit Card
Before you sign up, or decide to cancel a card, take a minute to think about the long-term financial plans you may have and how cancelling a card later might impact your credit score.
According to a 2019 Bankrate survey, 61% of American credit cardholders said they had cancelled at least one credit card, but just 42% knew that doing so typically hurts one's credit score.
1. Is the credit limit on this card helping my credit utilization ratio?
Your credit utilization ratio (CUR) is an important factor when determining your overall credit score. It's calculated by taking the amount of credit you use and dividing it by the amount of credit you have available across all your cards. In general, experts recommend using 30% or less of the total credit you have available across all cards at any given time. So, if you have a $12,000 credit limit, you shouldn't spend more than $4,000 at a time.
"By closing a credit card account, the consumer is taking some of their available credit off the table." says Tommy Lee, a principal scientist at FICO. If your spending doesn't change, but you have less credit available, your credit score could take a hit because you're utilizing more of your available credit.
2. When did I activate the credit card I'm considering closing?
Your credit history is another big piece of your credit score. It's the average amount of time that all of your credit cards have been active. In the eyes of lenders, a longer credit history is generally better because it proves financial responsibility overtime. That's one reason experts advise against closing credit cards, especially older ones, since doing so could shorten your average credit History.
Credit expert John Ulzheimer, formerly of FICO and Equifax, argues this line of thinking is a myth because your credit history is not immediately impacted when you close a credit card. It's the policy of the credit bureaus to leave any closed cards on your credit report for 10 years following termination. So long as they show up on the report, they are calculated into your average credit history age.
Even with the 10-year grace period, Ulzheimer says he would never recommend you close your oldest card because you always want the value of its age on your credit report.
3. Is having access to high credit card limits tempting me to overspend?
Credit cards with generous spending limits can serve up some serious temptation to overspend. Before you cancel a credit card, consider this other way to manage how you're using the card.
Take it out of your wallet and remove it from any and all Apps. Save it for that rainy day, and for most people, out of site is out of mind.
Is the card I'm considering closing a store credit card?
First of all, Store Cards are great when you open them, but that is it. They usually have APR's and very tight late charges. Studies have shown that shoppers with store cards end up spending more at the store than they would if they did not have the store card.
My advice, as a bankruptcy attorney, unless you are making a major purchase (new appliances, new flooring, etc) don't open it. If you have it, pay it off and close it. If you are doing a major purchase and are getting it interest free, make sure you pay it off before the promotion rate ends. Many stores will allow you to extend that time, if you call at the beginning of the purchase. Once it is done and paid off (while saving the interest), close it out.
How many is too many?
While there’s no set number of how many credit cards is too many, it’s less about the number of cards you have and more about how you manage them. Be frugal, and pay on time, and if possible, pay the entire balance. This will increase your score, and save you interest.
At the Law Office of Stuart M. Nachbar we want to help you get out of the financial hole, and help you get the fresh start that you need. For all your bankruptcy needs, call 973-834-8058.
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