Think cancelling your credit card is the path to financial freedom? Think again.cancelling a card will up your “utilization percentage,” meaning you’ll be using more capital even if you’re not spending. Translation? A crap credit score.
And if you think paying only the minimum on your balance will help, you’re wrong again.
Only 35% of your credit score is determined by when you pay your balance; the other 65% encompasses what happens when you cancel a card, including how old your credit history is, John Ulzheimer, president of consumer education at SmartCredit.com, tells Business Insider.
Before you pull the plug on your card, here are a few things to consider.
'Utilization percentage' is exactly what it sounds like: the percentage of available credit you're using.
So if you have two credit cards and both are worth $10,000, you basically have $20,000 in capital. If you max out one card and spend nothing on the second, your utilization rate will be 50%, because you'll be using half the capital.
cancelling one of those cards would spike your utilization percentage to 100%, which would lower your score, even if you weren't using the card to make purchases.
If you had five credit cards with $5,000 on each and wanted to cancel only one, for example, you would have to pay off the $5,000 balance as well as the $20,000 you owed on the remaining cards. This is the only way to keep your utilization percentage in check--and your score above water.
If you have a credit card with a low interest rate, no annual fee, and other perks, don't let it go, advises Credit Land: 'Most of the credit cards in the market today have high interest rates and many other charges and fees that credit cards in the past did not have.'
Many cardholders don't realise that 15% of their credit score is determined by the longevity of their credit history, says Ulzheimer.
Emily Davidson of Credit.com agrees: 'One element of your credit score is based on the age of your oldest card,' she says. 'Closing out the oldest card can bump your score into a new age range. And the score also looks at the average age of your credit cards. You don't want to close the oldest card, or even the older ones.'
If you tend to purchase extended warranty on electronics, your credit card may offer this service free of charge, reports Yahoo! Finance. American Express offers cardholders at least an extra year of protection and Visa gives consumers similar protection on certain cards.
Ulzheimer says doing so will decrease your utilization percentage by the lowest amount possible, a plus for your score.
This will prevent you from erasing your credit history by cancelling the oldest card, says Ulzheimer.
If overspending and debt are the real issue, just shred the card, says Ulzheimer. This way you can't use it to spend, but you also won't close it and damage your score. The card will simply expire and you can work to pay off the debt in the meantime.
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