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.
Question #3: How many credit cards do I have?
If you have credit cards that number in the double digits, you can probably close one or 2 without damaging your credit. However, it’s a good idea to space out the cancellations over time, such as one every 6 months.
But if you have just one or two cards, closing accounts will have a bigger impact by causing your utilization rate to significantly increase. Also, having a mix of credit types—like loans and credit cards—is a factor in how credit scores are calculated.
So don’t cancel your only credit card. I recommend that you always have at least one credit card in good standing.
Question #4: What’s the cost of my credit card?
Some card issuers charge an annual fee—especially when the accounts come with valuable rewards, such as cash back, airline miles, or points for merchandise. Analyze the rewards you’ll get based on how much you plan to use the card.
If you can’t afford the annual fee or won’t use a rewards card, common sense should be the deciding factor, not your credit score.
Question #5: Will I need credit in the near future?
If you’re planning to finance a big purchase, such as a home or vehicle, in the next 3 to 6 months, I don’t recommend closing any credit cards. If your utilization rate increases and your credit scores take a dive during the application process, you may be turned down or offered a too-high interest rate.