If you have run into some credit card trouble you need to be careful how you close your cards to keep your credit rating in check. A bad credit rating will affect future possibilities such as applying for a home loan.
Does your card still have a balance?
Credit scores are partially based around a credit to debt ratio so if you had $5000 worth of debt on a credit card with a limit of $10,000 your ratio would be 50%. If you closed your credit card with debt remaining it looks like your credit is $0 and that it appears that you have maxed out your credit. This could have a severe negative impact on your credit score.
Do you only have one card with available credit?
Similar to whether you close a card with a remaining balance, this again if you close the card looks as though you have utilised all available credit.
Do you only have one credit card left?
You may have all seen a friend who struggles with applying for a loan because they have never had any credit cards in their life. Whilst it seems counter-intuitive not having any credit cards can significantly impact your credit rating mainly because credit providers are unsure about how you can handle future credit. Keeping one card can improve your scores.
If you are worried about getting into debt try and lower your credit limit and be more disciplined with your expenditure.
Do you want to close your oldest card?
When you have a short credit history this can also affect how much risk the banks or other credit providers are willing to take on. Closing your oldest credit card will effectively reduce your credit history, making you riskier to the lenders. This may not affect your score short term wise, but once the card drops off your credit history you may see your score take a hit.
Does your credit card have good features?
All credit cards have a number of hidden terms and fees. Let’s face it, the cards aren’t there to make you money, they are there to make the institutions money. If you find one with low interest rates, no annual fees, and other benefits you are better keeping this then one which is costing you money.
What to do if you are going to close your credit card?
If you are going to shut down some credit cards keep the above points in mind. In some cases you may be able to contact your credit provider to see what impact closing your card may have on your score. Perhaps before you do it might be in your interest to access your credit file report beforehand to see whether your credit score may be already tarnished.
You should do this once a year and make sure that previous closed accounts do indeed state that they are closed. If you want to find out how to get your free credit file click here.