6 questions to ask before canceling a credit card

It can be so tempting to want to jump on all the tempting credit card offers that are offered to you (hello, thousands of reward points and refund offers!). But before you sign up, take the time to think about your long-term plans for this credit card and the consequences of canceling such a card on your credit score.

In a 2019 Bankrate survey, 61 per cent of US credit card holders said they had canceled at least one credit card, but only 42 per cent knew this was generally detrimental to their credit score.

"Knowledge is power," said Priya Malani, founding partner of Stash Wealth, a millennium-focused financial planning company. "It's important to understand that canceling a credit card can hurt your credit score so that you can make informed decisions and develop a plan to repair the damage in advance, rather than panic. "

While Malani says that closing a credit card is not always a bad thing, she adds that "it's nice to understand the consequences on your score for not being taken at free ".

There may be a number of reasons why you might want to cancel a credit card. Maybe you're tired of paying high annual fees or want to limit your potential for excessive spending. But before landing the phone to formalize your separation, here are six questions you should ask yourself to make sure you do not damage your credit score.

Your credit usage rate (CUR) is an important factor when determining your overall credit score.

It is calculated by taking the amount of credit you use and dividing it by the amount of credit available on all your cards. In general, experts recommend using 30% or less of the total credit you have on all cards at any one time. So if you have a $ 12,000 credit limit, you should not spend more than $ 4,000 at a time.

"By closing a credit card account, the consumer withdraws some of his available credit from the table." says Tommy Lee, Senior Scientist at FICO. If your expenses do not change, but your credit is less available, your credit score could suffer as you use more of your available credit.

If you can not stay below the 30% threshold, Malani suggests calling your credit card company and asking them to increase your spending limit.

If you choose this way, it warns you to do it with caution. "A higher limit does not mean you should charge more on your card," says Malani. "Do not forget to never put something on your credit card that you can not pay in full when the statement is due, otherwise you use your credit card to lead a lifestyle that you can not do you to permit."

Your credit history is another important part of your credit score. This is the average time during which all your credit cards have been active. In the eyes of lenders, longer credit histories are usually better because they prove the financial responsibility for overtime. This is one of the reasons why experts advise against closing credit cards, especially older ones, as this could shorten your credit history.

Ulzheimer argues that this line of thinking is a myth because your credit history is not immediately affected when you close a credit card. The credit bureaus policy is to leave the cards closed on your credit report for 10 years after the termination. As long as they appear in the report, they are calculated according to the average age of your credit history.

Even with the 10-year grace period, Ulzheimer said he would never recommend you close your oldest card because you still wanted to keep the value of his age on your credit report. .

For some people, credit cards with generous spending limits can serve as a serious temptation to spend too much. However, unless your spending habits have become a real problem, before canceling a credit card, consider other ways to manage your use of the card.

"Closing a card just because you do not trust yourself is not a good idea," says Malani. "As an adult, you will need a good credit score and having a credit card (two or three) open and in good standing is a great way to get the credit you want. achieve it. "

His advice? Instead of canceling your card, remove it from your wallet and stick it in a drawer. In this way, your map is out of sight, away from the mind. It is also important to remove it from Apple Pay and all online retailers where you might have saved your information for easy purchases.

Ulzheimer argues that excessive spending is a legitimate cause of cancellation. "If you can not control your expenses, closing the card is a good idea," he says. "But you should at least know that you could end up with a lower credit rating as a result."

If you find yourself in a position where you need the help of a professional to set your consumption habits, services are offered. Debtors Anonymous is a support program designed to help people stop indebting unsecured debts. To find out if this is for you, you can learn more about the 12-step program or visit the organization's website to view free publications on the subject.

The Financial Counseling Association of America (FCAA) is a national association representing credit counseling companies. This is a great place to start if you are looking for a credit counselor.

When it comes to storing credit cards, Malani and his Stash Wealth team advise you to avoid them completely. "It all boils down to human psychology," says Malani.

Studies have shown that shoppers with store cards end up spending more at the store than they would if they did not own the store card. According to her, this occurs when you feel that you are getting an agreement, for example a free delivery, because you are a VIP member. You think of saving money even if you spend more.

"We almost never recommend opening a store card unless you make a major purchase, such as buying a piece of furniture, in which case the initial promotion provides a significant monetary benefit," he said. said Malani.

She adds that since store cards usually have low credit limits and above-average interest rates, it's best to use the store card only to get the initial discount you're looking for and close it as soon as you pay it.

Although there is no set number of too many credit cards, it's less the number of cards you have than the way you handle them.

"In most credit score calculations, the most important component of your credit score is accountability," said Malani. "So, be sure to pay your bills on time and in full."

If you think your cards have become too difficult to handle, consider proposing a strategy to organize yourself before closing them.

"Set up reminders, set up the automatic payment feature," says Malani. "Do what you need to do to demonstrate your responsibility."

Given the many milestones that require you to have good credit, it is essential to take into account your personal and financial goals before canceling a credit card.

"If you have a good credit score and are considering applying for a mortgage, car rental or even renting an apartment, you would not want to cancel a card because it could tarnish your score," says Malani. .

If you have already canceled a credit card and your credit score has suffered, or if you want to increase your score in general, there are simple ways to do it: pay your bills in full and on time, maintain a CUR of less 30% and regularly review your credit report for errors.

Even though Ulzheimer says that there is "no general advice for everyone", it is important to keep in mind these general best practices if you want your score to be high. ;improved. He adds that "it will take a while to get your score back," which means that patience and consistency are essential to improving your score.

"If your scores are lower because of credit card debt, you will have to work to pay for it," says Ulzheimer. "And your scores can certainly be low due to a combination of factors, such as late payments and over-indebtedness of credit cards – these are the hardest to get because you really have to change everything to manage your credit card. credit."