Why you probably shouldn’t close a credit card after you’ve paid it off

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Don’t rush to cancel the card or you might regret it.

If you’re struggling to pay off your credit card debt and your balance finally hits $ 0, you may be considering closing the account. After all, if you no longer plan to use the card, you may not see any reason to continue to maintain the account.

The reality, however, is that it is often a very bad idea to rush to call your creditor to close your account. Here’s why.

Closing an old credit card can have this damaging effect

While closing an old card might sound nice, it could hurt your credit score in a number of ways.

First of all, when you close the account, it will no longer show up as an active account on your credit report. The average age of your account history will be shorter because this old card is no longer active. The average age of your credit report is one of the factors used to determine your credit score. And it’s better to have a longer history of borrowing behavior rather than a shorter one.

And, while the account will not immediately disappear from your credit history, it will eventually disappear completely from your credit report. If you have a positive payment history with the account, there is little reason to lose it by closing the account – especially if you can just keep it open and continue to get a record of payments on time since you aren’t charging anything over. this. Payment history is actually the most important factor that determines your credit score.

Closing the account will also reduce the amount of credit you have available. Since another key part of your credit score, known as the credit utilization ratio, is another key component of your credit score, because credit used versus credit available, it can seriously damage your credit.

If you previously had total credit of $ 10,000 and close an account with a limit of $ 5,000, you only have $ 5,000 of available credit. If you have a $ 1,000 balance on the open card, your credit usage rate would immediately drop from 10% to 20%. While this number should be kept below 30% to avoid damaging your credit score, the lower your usage rate, the better for your credit report.

Since there are different ways to close an old card to hurt your credit, it’s rarely worth it.

Now there can be limited exceptions if you have a secured card and want to get your deposit back or the card has a high annual fee. But even in these situations, it’s worth calling the creditor and asking if you can switch to another card in their lineup rather than shutting down the account altogether. This could potentially allow you to switch to an unsecured card or a no-charge card while still maintaining your account history.

At the end of the day, your credit score is very important and closing old accounts can hurt it. So try to avoid doing this unless you have other options.


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