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How closing a credit card account affects your credit score

Remember the excitement surrounding your first credit card? He probably applied for a credit card when he went to college or maybe his parents offered him some advice. Either way, he’s had that card since he was a teenager or early 20s and it’s probably not the best card in his wallet. He may have a high interest rate, no rewards, or a high annual fee.

Once you started building good credit, you were probably offered better credit cards. Your interest rates are lower, you probably have no or low annual fee, and you probably have access to airline miles or cash back rewards. So why keep the card that no longer serves you?

How will closing accounts affect my credit?

The important thing to remember is that when you make the decision to close a credit card account, you are lowering your credit utilization ratio. Remember that credit utilization accounts for 30 percent of your total score calculation. You’ll need to cut back on clothing expenses when you close a credit card account or you’ll likely exceed the recommended 30 percent utilization rate, causing your credit score to plummet.

The average age of your credit accounts is another important factor in your credit score. This is double. If you’re new to credit, it’s best to keep your old cards open because they’ll stay on your credit for 10 years. That card, though rarely used, is actually helping your credit, especially if you have a good payment history. Closing it could hurt your credit far more than someone who has been building credit for over a decade.

So what can I do?

If you have a high interest rate or a high annual fee, try negotiating with your credit card provider. Sometimes if you tell them you’re considering canceling the card due to high fees, etc., they may work with you. It costs them much more money to acquire a new customer than it would cost them to waive their annual fee or lower their interest rate.

Sometimes you have to close a card. If it’s costing you money because the credit card company won’t negotiate a waiver or lower annual fee, there’s no point in keeping it. Your credit might take a hit, but it will bounce back. However, you can’t recover lost funds due to annual fees from a card you don’t use.

Closing a credit account should not be taken lightly. Be sure to consider the factors listed above before closing your accounts.

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