Cancel or not a credit card: this is probably the most frequently asked question about personal finances. Everyone wants to know if they should cancel a credit card that is no longer used or simply use force and charge nothing again.
The problem is that both answers are good. It depends on several factors such as your goals, your credit history, your credit rating, and your spending habits. The main problem in canceling a credit card is that this cancellation will not be without consequence. This will affect your credit rating and other aspects of your financial life will also be affected.
There are many good reasons why you would like to cancel a credit card, including wanting to reduce the number of cards you have, try to rely less on credit or find a card that best suits your needs. Whatever your reason, consider the following factors before canceling your credit cards.
Your credit history and the age of your accounts
You build a credit history when you use a credit card. All your actions, payments, and even mistakes are recorded on your credit report. Your credit history is very important because it provides information about your credit habits to future creditors and lenders when they need to check your credit rating. Before canceling a credit card, you need to know whether or not the cancellation will negatively affect your antecedent and so on your credit rating. If you want to cancel one or more credit cards because you have too many, cancel the most recent ones. Try to always keep your oldest cards. Canceling an old card will not automatically affect your credit rating since accounts remain visible on your credit report for 10 years.
By cons, after 10 years, you may regret having canceled this account that could have 10 years more. because the account could be 10 years older.
Points and fees
Does the card you want to cancel cost you a fee? Or do you accumulate points that are really useful to you? These are some questions you need to ask yourself seriously before deciding to cancel a credit card. If you have a rewards credit card with high annual fees, ask yourself if these points are worth the cost.
Finally, if you decide to cancel a rewards credit card, make sure you use the points or at least know what will happen to those points after the cancellation. It would be a shame to waste all the points accumulated with a simple cancellation.
Your percentage of use
Your credit usage percentage is the factor you need to pay the most attention because it will have a direct and immediate effect on your credit rating in case of cancellation. Your credit usage percentage is the amount of available credit that you must use in relation to the amount you actually use. You can calculate this amount by dividing your current credit card balances by the total limit of your credit cards. In general, you should make sure your usage percentage is 30% or less.
For example, say you have 3 credit cards and each has a limit of $ 5,000, which means your total credit limit is $ 15,000. If you currently have a balance of 4,000%, this means that your usage percentage is 26% (4000/15000), which is very high.
The use of credit or your total debt level is one of the top five factors that directly affect the calculation of your credit rating. If your credit percentage is too high, your credit rating will be negatively affected. In addition, potential lenders do not like credit utilization ratios that are too high. This shows that you could have a debt problem.
That is why it is important for you to consider all this before canceling a credit card, especially if you might be looking to apply for a mortgage or loan in the near future. A low credit rating and a percentage of credit usage may prevent you from being approved.
The balance of your cards
This factor is certainly less important than your credit usage, but you should still consider it anyway. If you decide to cancel a credit card, you must make sure that you have refunded all the balance owing. A provider may allow you to cancel a card even if it has a balance. Setting aside an outstanding balance or interest charges could seriously affect your credit rating.
Make the right choice for your situation
Your credit rating is very important, but it is not as important as being debt free or having good financial management. If having too much credit card affects your credit rating or your debt level, we believe it is in your best interest to manage your financial situation before your credit rating. But we also believe that you need to project yourself into the future a bit more, especially if you see a mortgage or loan.