As a fairly credit savvy person (I mean, I write about this stuff for a living), I’m well aware that canceling a credit card can have negative repercussions. When you close a credit card that you’ve opened for many years, it can affect the length of your credit history, which is a big factor in calculating your credit score. credit rating.
Closing a credit card can also lower your score by increasing your credit utilization rate. This ratio measures the amount of available revolving credit you’re using at the same time, and the higher it is, the more it can hurt your score. If you have three credit cards, each with a credit limit of $ 5,000, and you close one of those accounts, your total limit will drop to $ 10,000, which could cause your credit rate to increase. use of credit.
It is for these reasons that I am generally quite cautious closing credit cards I do not use often. But last year I chose to close a credit card, and it was actually a very wise financial decision.
When to close a credit card pays off
A general rule that I like to follow when it comes to credit cards is to never pay an annual membership fee it does not pay for itself. Sometimes, in exchange for a modest fee, you will get additional perks from a credit card that offset those fees. But if you don’t have a certain card, then paying a fee for it doesn’t make sense.
This was the case for the travel reward card I chose to close. When I first signed up, I took quite a bit of air travel and got a number of perks, such as extra air miles and free checked baggage, in exchange for the annual fee of $ 95. supplied with the card. But since the start of the pandemic, I haven’t taken a plane yet. And in the absence of taking flights, keeping that credit card open and paying its fees didn’t make sense.
The other reason I chose to close my travel rewards card was because it was a relatively new account. And so I knew the closure wouldn’t have too much of an impact on the length of my credit history.
In addition, because I have no outstanding credit card balances, and my existing credit cards come with generous spending limits, I don’t have to worry about my credit utilization rate climbing into unfavorable territory. So even though closing my travel rewards card reduced my total credit limit, it wasn’t much of a problem.
I also know that my income has increased since the last update from some of my credit card companies. For this reason, I am likely to be approved for a higher spending limit if I decide to request one.
Don’t pay unnecessary fees
Sometimes it makes sense to pay an annual fee for a credit card. But in my situation, I wasn’t reaping enough benefits to make these fees worth paying. And since I was not looking at a notable damage to credit score in closing my account, canceling this travel card was a smart decision.
If you have multiple credit cards open, it’s worth taking a close look at those that charge annual fees and make sure you really get what you pay for. The last thing you should do is waste money on annual fees that don’t catch up.
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