Are you going to cancel your Credit Cards? Wait! Of course, you can cancel your Credit Cards anytime but, have you ever imagined what happens if you do that?
It is very easy to get rid of a Credit Card but, there is another side of it, which is not that easy to bear.
Yes, canceling Credit Cards are not just a good habit, as there are many things can put you in trouble.
There are certain things which you need to make sure before you cancel your credit cards and if you do, no more trouble will follow you. And that is exactly what I’m going to teach you today.
Possible outcomes of this article
By the end of this article you will learn:
Why and when you will need to cancel a Credit Card?
What happens to your Credit Score when you cancel your Credit Card?
What do you need to make sure before you cancel your Credit Cards?
So, let’s get started.
Why and when you need to cancel your Credit Cards?
Why? This is something that you need to ask yourself.
I have canceled my Credit Cards before, as a way to get rid of the debt, because, I had multiple Credit Cards with lots of debt in all of them.
And, most of my Credit Cards had an annual fee and it was better to cancel at that time.
For me, it was the only way to a debt free life.
If you need to pay hundreds of dollars as an annual fee to the Credit Card, and/or if the rates are pretty high and you already have another one with lower rates, better to cancel it as soon as you can.
But, if none of these are the case, why you need to cancel it!
A No Annual Fee Credit Card is always an asset which you can keep in your wallet forever.
What happens to your Credit Score when you cancel your Credit Cards?
There are a couple of things will happen when you Cancel your Credit Cards.
- Your Overall Utilization Ratio Increases when you cancel your Credit Cards.
- Your Average length of Credit History will decrease.
#1 Overall Utilization Ratio increases when you cancel your Credit Cards
This is the main reason why people say, don’t cancel your credit cards.
Let’s say, you have two credit cards with $5,000 credit limits in each. I’m going to call them ‘x’ and ‘y’.
In the ‘x’ credit card, you have $5,000 balances (I mean, debt) and in ‘y’, you don’t have any outstanding balances.
So, as a result, your overall utilization ratio is 50% already.
(Overall Credit limit is $10,000 and overall balance is $5,000 which means 50% utilization).
Now, you decided to cancel ‘y’ credit card as there are no outstanding balances and you will not need to think of it anymore.
What do you think about your Utilization ratio now? It is 100% now!
The Credit Card company will definitely report this to the Credit Bureaus, and do you know what happens next?
You will see a drastic decrease in your Credit Score and it will take the time to get it back to where it was.
So, always make sure that canceling your Credit Cards will not affect your current utilization ratio.
#2 Average Length of your Credit History will decrease when you cancel your Credit Cards
It is clear from the headlines itself and if it is not, I will explain it with your ‘x’ and ‘y’ Credit Cards.
Let’s say that you have your ‘x’ credit cards for 10 years now and ‘y’ for 6 months.
Let’s assume that the amount of Credit is same as above situation (no debt on ‘x’ and $5,000 debt on ‘y’).
And you’ve decided to cancel your ‘x’ credit cards. What will be the results?
Your overall credit history will decrease from 10 years to 6 months and a utilization ratio of 100% – this will lead you to a terrible situation.
This will show up on your Credit Report once the Credit Card company had reported that to the Credit Bureaus.
Now you understand what happens to your Credit Score and History when you cancel your Credit Cards. Right?
But, you still need to cancel it, as a way to a debt free life and live without any burden.
Everyone wish to do that. So, here is what you need to do before you cancel your Credit Cards;
List of things you need to make sure before you cancel your Credit Cards
#1 Keep Low Overall Utilization Ratio
You already know the consequences of higher utilization ratio and how it will affect your Credit Score.
So, before you cancel your Credit Card, calculate the overall utilization yourself and make sure that it won’t strike the roof.
The recommended utilization ratio is below 50% and below 35% is great.
#2 Do not kill your Credit History
Always make sure to cancel your – recently approved credit cards (keep old credit cards with you), as a way to maintain your average age of your Credit History.
#3 Cancel all your auto bill pay options
This is a common mistake happens to most of them, while canceling their credit cards.
Always make sure to cancel all the auto bill pay options from the credit card which you are going to cancel.
Otherwise, these services will try to charge you from the canceled credit card which results in late payment fees, penalties, etc.
Sometimes it may affect your Credit too if the service provider reports any of this to the Credit Bureaus.
Do not invite a bad luck.
#4 Do not forget to redeem rewards
This is also a common mistake that can happen when you cancel your Credit Cards.
When you cancel your Credit Cards, there are chances to lose all your rewards as the account has removed from the directory, right?
Sometimes, you might be able to call and fix it, but what if you can’t! You will lose all your rewards.
So, always make sure to redeem your rewards before you cancel your Credit Cards.
No one will encourage you to cancel your Credit Cards. But, this can be done easily without any trouble, if you follow the proper ways that I listed in this article.
Finally, you’ve canceled your Credit Cards, what next?
It is not done yet.
I recommend you to access your Credit Reports to see everything went through well, Once you’ve canceled your Credit Cards.