This is why you should think twice before canceling an unused credit card

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Credit cards are a great tool to manage your finances, but they require responsibility and consideration. Cancelling your credit card can have a significant impact on your credit score as well as the overall health of your finances.

There are many reasons to think twice about closing a credit card that you no longer need.

Credit score damage may result from closing a credit card

Closed credit cards can have a negative effect on your credit rating. FICO scores are based on the following factors: payment history (35%), amount owed (30%) length of credit history (15%), and type of account used (10%).

Cancelling a credit card could reduce the average age of your accounts. This can have a negative impact on your score. It's best to keep your account open if you have already seen a drop in your credit score due to negative items such as late payment or high debt.

Closing too many accounts can also indicate to lenders that they are not long-term customers. You could be seen negatively when you apply for credit or loans in the future.

Credit utilization ratio - Impact

Credit utilization ratio is how much credit you have available in comparison to what you are using. This is a key factor that determines your FICO credit score. It accounts for about 30%. You can reduce your credit limit by canceling a card. This will increase your credit utilization rate if there are balances on the remaining cards.

As an example, suppose you have three cards with a credit limit totaling $20,000 and $5,000 in the account. Credit utilization would be at 25%. This is considered to be a good credit ratio. If you cancel the credit card with a $5,000 credit limit, then your credit available would be $15,000. If you cancel one of those credit cards with a $5,000 limit, your available credit would drop to $15,000.

Credit history impact

Credit history represents about 15% of the FICO score. You also affect the length of your history when you cancel a card. Your credit score will be higher if you have had credit cards open for a longer period of time. This shows that you are responsible with credit.

Cancelling a credit card may also affect the mix of types of credit you have. This represents around 10% of your FICO Score. Lenders look for a variety of credit types such as car loans, mortgages and credit cards.

Benefits and rewards

If you close your travel credit card, you may lose points or miles.

You could lose points if you cancel a credit card with rewards. This is mostly true for transferable reward programs such as Amex Membership Rewards (formerly Capital One Venture Miles), Chase Ultimate Rewards (formerly Chase Ultimate Rewards) and Citi ThankYou. To avoid losing your points, you'll need to transfer or redeem them before you cancel your card.

If you cancel a credit card you may lose all your points. Most miles and points will expire if you don't use them for 12 to 48 months. Spending on your credit card counts as a qualifying activity to keep your rewards active. The timer starts when you cancel your co-branded card. You'll need to act quickly to redeem or extend your points.

If you cancel your card, many credit cards include benefits like travel insurance, extended warranty and purchase protection. Before canceling your card, it's crucial to know what benefits you are giving up.

Credit opportunities in the future

Cancelling a credit card can affect your ability to be approved for credit in the future. Creditworthiness is determined by lenders based on your credit history and score. Credit applications, as well as a history that shows you have cancelled credit cards in the past could raise a red-flag.

Banks prefer customers who are loyal and stay with them for a long time, rather than those who sign up for credit cards only to cancel their cards. Keep at least some credit cards open for the long term to improve your credit rating.

Access to credit in a recession is a lifeline

It can be helpful to have more credit available during a recession.

Accessing credit could become harder in the future if a recession is on the horizon. Credit cards are a lifeline during any recession.

If you are facing a cash flow problem or layoff, credit cards can be used to pay your bills temporarily. This is particularly helpful if the credit card has a 0% APR for purchases or balance transfers. You can also consider a lower-cost card if you wish to maintain a credit line for future purchases or balance transfers, but avoid the annual fee.

Reduce your annual fee by downgrading to a lower-cost credit card

Consider downgrading your credit card if it has a high fee to save money and keep your credit open.

Consider downgrading your credit card to one with a lower annual fee or even one without any. You can choose from many credit cards that have lower annual fees. If the Chase Sapphire Reserve (r) annual fee of $550 is too much, you can switch to the Chase Sapphire Preferred Card with a $95 fee. If you think the $95 annual charge on the Sapphire Preferred Card is too high, you can upgrade to the Chase Freedom Flex (sm) or Chase Freedom Unlimited (r), both of which come with no annual fee.

If you're looking to preserve your credit score and save money on annual fees, downgrading your card is a wise financial decision. You can maintain your positive credit score by downgrading your card rather than cancelling it. This will also allow you to keep your credit limit and some rewards. You can also maintain your relationship with the credit card company. Before changing credit cards, make sure you research all your options and take into consideration your spending habits.

What is the catch of converting a credit card rather than closing it?

Although downgrading your credit card may be an option that is attractive to some, you should consider the pitfalls before switching. You may lose some rewards or benefits from your original card. If you downgrade a premium card from travel rewards to a standard card, for example, you might lose access to airport lounges, travel credits, or other premium benefits.

In the same way, downgrading a card could mean that you lose benefits such as extended warranty protection, travel insurance, or purchase protection. The lower-tier cards may not provide the same benefits and have higher interest rates.

Before downgrading your credit card, it's crucial to carefully weigh the pros and cons. Review the terms and conditions of the new credit card and make sure you understand the impact it could have on your rewards, benefits and rates.

It is possible to close your credit card

If you don't use your credit card and have other cards that offer similar benefits, closing it can be a good idea. You might consider cancelling your credit card if you have an annual fee that you do not want to pay.

Closing a credit card can be helpful if you want to reduce your debt quicker. It will help you avoid the temptation to make additional purchases.

Bottom Line

It's not always possible to avoid closing a credit card, but you should be aware of the options available and any potential consequences. Closing your credit card may affect your credit utilization, credit history, and credit mix. All of these factors can negatively impact your credit score.

Other financial consequences could also result from losing valuable benefits and rewards. You can avoid these disadvantages by downgrading your card, or contacting your bank to ask them to waive your annual fee. Consider your options, do the math and decide what is best for you.

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