Not sure if you should cancel a credit card? Laura answers a listener question and gives you five questions to ask that will help you know whether closing a credit card will barely affect your credit scores or end up hurting your finances.
One of the most powerful tools you can use to manage money and build good credit is a credit card. But the downside is that mismanaging one can be devastating to your financial health.
If you’re considering canceling a credit card because you don’t want the temptation to use it or you want to swap it out for a better card, it’s important to understand how canceling credit cards affects your personal finances.
I received a great question about canceling a card from a member of my Dominate Your Dollars Facebook group named Stephanie C., who says:
“My credit card has an interest rate of over 20% even though my credit is excellent and I’ve never made a late payment in the 14 years I’ve had the account. I rarely carry a balance and use it as an emergency card. If I shop around for a card with a lower rate should I keep this one open until I’m approved for a new card?”
In this post, I’ll give you a good strategy for canceling credit cards that won’t hurt your credit or the chances of reaching your future financial goals.
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Why It’s Important to Build Good Credit
Before I explain the relationship between credit cards and your credit scores, I want to take a step back to explain why it’s critical to build good credit in the first place. Many people don’t fully understand how wide-reaching credit is.
Having good credit allows you to get the most competitive interest rates and terms on credit accounts such as credit cards, mortgages, car loans, student loans, and personal loans. For instance, paying just 1% less for a mortgage could save you over $100,000 on the cost of a 30-year, fixed-rate loan, depending on the total amount you borrow.
But even if you never borrow money to finance a home, car, or use a credit card, having good credit gives you significant benefits, including:
- Lower auto insurance premiums (in the majority of states)
- Lower home insurance premiums (in the majority of states)
- More rental housing opportunities
- Lower security deposits on utilities
- More government benefits
- Better chances to get a job
The only way to build credit is to have active credit accounts in your name and use them responsibly over time. That shows you’re a low risk to a lender because you can be trusted to repay debt as agreed.
The only way to build credit is to have active credit accounts in your name and use them responsibly over time.
The credit accounts you use and the payment history they report to the 3 nationwide credit bureaus (Equifax, Experian, and TransUnion) lay the foundation for your credit scores. If you don’t have a credit history built up, when you apply for a loan you could be denied because you have a “thin” credit file.
In other words, having no credit is similar to having bad credit because it doesn’t give a creditor information about how you would handle a potential credit account.