If you've been thinking about cancelling a credit card, it’s critical to understand how it will affect your entire financial life. Laura covers 10 dos and don’ts for when to cancel a credit card that will help you minimize credit damage and improve your finances.
Maria O. says, “I’m a huge fan of the Money Girl Podcast and am also a Get Out of Debt Fast student. I’ve taken your financial advice and am glad to say that my husband and I are in a much better financial situation now.
We both have travel rewards credit cards with zero balances that we haven’t used in over a year. We know that canceling cards isn’t advisable, but we really want to stop paying the $95 annual fee. My husband’s credit score is 780 and mind is 818. What do you recommend?”
Maria, thanks so much for your question and being a part of the Money Girl community!
Before you cancel a credit card, it’s critical to understand how it will affect your entire financial life. Whether you should get rid of a card depends on a variety of factors, including your future financial goals.
In this post, I’ll cover 10 dos and don’ts for when to cancel a credit card. You’ll learn how to manage these accounts wisely so they improve your finances and don’t hurt them.
10 Dos and Don’ts for When to Cancel a Credit Card
- Do cancel credit cards that are a net loss.
- Do cancel credit cards with low credit limits first.
- Do cancel credit cards that tempt you to overspend.
- Do cancel credit cards to simplify your financial life.
- Do cancel credit cards you recently opened by mistake.
- Don’t cancel your only credit card.
- Don’t cancel credit cards you’ve owned a long time.
- Don’t cancel multiple cards at the same time.
- Don’t cancel credit cards if you’re planning to make a big purchase.
- Don’t cancel credit cards because you’ve made late payments.
Before I cover each of these dos and don’ts, here’s an overview of why building good credit and using credit cards the right way is so important.
The Benefits of Building Your Credit
Having good credit simply means that you have a reliable financial track record according to the data in your credit history with the nationwide credit bureaus: Equifax, Experian, and TransUnion. Different credit scoring models use that data to calculate credit scores, which act as shortcuts for various businesses to evaluate you quickly.
When you have high credit scores, potential lenders and merchants have more confidence that you’ll be a good customer who pays their bills on time. That’s an incentive for them to give you top-tier offers, which saves you money.
Having good credit scores allows you to get the most competitive interest rates and terms when you borrow money using 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.
However, even if you never borrow money to finance a home or charge a vacation to a credit card, having good credit gives you other significant benefits, including:
- Lower auto insurance premiums (in most states)
- Lower home insurance premiums (in most states)
- More opportunities to rent a home or apartment
- Lower security deposits on utilities
- More government benefits
- Better chances to get a job
The Connection Between Credit Cards and Your Credit
The only way to build credit is to have active credit accounts in your name and to use them responsibly over time. That’s where credit cards come into play.
One of the biggest factors in how credit scores are calculated is called your credit utilization ratio. It only applies to revolving accounts, such as credit cards and lines of credit, which don’t have a fixed term. Credit utilization isn’t measured for installment loans, such as mortgages and car loans, because they do have a set ending or maturity date.