Credit Card Cancellation: Is it a Wise Decision?
A question that troubles individuals the most, when they are in the process of cleaning up credit report, is whether to ditch their old credit card. It is always better to understand how the cancellation might impact the credit score in such circumstances. Therefore, if you are puzzled by the question ‘how to repair my credit now’, you need to consider the advantages/disadvantages of the credit card that you own. Here are some of the points to consider, when it comes to deciding whether you need to keep or cancel your credit card.
How Credit Card Influences the Credit Score?
Cancellation of a credit card may drop of your credit score, but the severity of loss depends on a number of factors. According to the Fair Isaac Corp. (FICO), the credit score is based on five major factors:
Payment History -
35 percent of your credit score depends on whether you pay your bills on time that includes your phone and credit card bills.
Credit Utilization ratio-
30 percent of the credit score depends on your credit utilization ratio. The ratio is determined by taking into account your revolving credit balance versus the available credit.
Credit History -
The length of the credit history is the third important factor and accounts for 15 percent of the credit score.
New Credits -
Recently opened accounts and credit inquiries impact your credit score by 10 percent. You need to note that too many credit inquiries might have a negative impact on your credit score.
Number and Types of Accounts -
Credit cards, retail accounts, mortgages and auto loans issued on the name of an individual impact his credit score by 10 percent. A mix of credit has positive affect on the score.
When Can You Cancel the Credit Card?
No Outstanding Payment
As discussed earlier, the length of your credit history accounts for 15 percent of the credit score and your debt-to-credit utilization ratio has 30 percent impact on your credit score. If you don’t have any pending credit card payment and there’s no major purchase plan lined ahead, you may cancel the credit card. The impact of the cancellation might be negligible in the long run.
High Annual Fees
Many credit cards have a high annual fee and whether you use the card or not, you need to pay the specific amount annually. If the credit card is lying in your wallet unused for a long time, it is better to get it cancelled instead of paying hefty annual charges.
There’s, however, a clause to cancelling the card. Many credit card companies offer incentives to individuals to stop them from cancelling a card. If your card company gives you an annual waiver, you might not want to cancel the card.
New No-fee Cards
Some credit card companies offer no-fee cards to expand their client base, which appears to be a good deal. If you are able to get a good no-fee credit card, you might go ahead with cancelling the older one.
When to Avoid Canceling a Credit Card?
If the Card has a Long Credit History
The credit history is the third important criteria that are taken into consideration for calculating your credit score. Individuals are advised to consider the length of time for which they used the card. Cancellation of a long-standing credit card will have an affect on your credit history and your credit score.
If it is the Only Card that you Have
A healthy mix of credit accounts has a positive impact and makes up to 10 percent of the credit score. If you own only one credit card, it is advisable to avoid cancelling it, as it will hurt your credit score.
If the Card has More Pros than Cons
When the credit card has a high annual fee, less bonus points and no additional incentives, it is better to get the card cancelled. If your are unable to keep a check on the spending habits and addicted to use the credit card to its maximum limit instead of taking it out only in emergencies, cancellation is probably the best thing to do.
If you are able to keep the credit utilization ratio to the minimum, despite of owning multiple credit cards – cancellation might not do any good to you. An individual needs to opt for cancellation only if he is misusing the extra credits available and hurting the credit score. Cancelling your credit card may hurt your credit score to some extent but it will help you have a better financial future in the long run.