When to Cancel a Credit Card? 10 Dos and Don’ts to Follow

Before you cancel a credit card, it’s critical to understand how it will affect your entire financial life. Whether you should get rid of a card depends on a variety of factors, including your future financial goals.

In this post, I’ll cover 10 dos and don’ts for when to cancel a credit card. You’ll learn how to manage these accounts wisely so they improve your finances and don’t hurt them.

Before I cover each of these dos and don’ts, here’s an overview of why building good credit and using credit cards the right way is so important.

The benefits of building your credit

Having good credit simply means that you have a reliable financial track record according to the data in your credit history with the nationwide credit bureaus: Equifax, Experian, and TransUnion. Different credit scoring models use that data to calculate credit scores, which act as shortcuts for various businesses to evaluate you quickly.

When you have high credit scores, potential lenders and merchants have more confidence that you’ll be a good customer who pays their bills on time. That’s an incentive for them to give you top-tier offers, which saves you money.

Having good credit scores allows you to get the most competitive interest rates and terms when you borrow money using credit cards, mortgages, car loans, student loans, and personal loans. For instance, paying just 1% less for a mortgage could save you over $100,000 on the cost of a 30-year, fixed-rate loan, depending on the total amount you borrow.

However, even if you never borrow money to finance a home or charge a vacation to a credit card, having good credit gives you other significant benefits, including:

  • Lower auto insurance premiums (in most states)
  • Lower home insurance premiums (in most states)
  • More opportunities to rent a home or apartment
  • Lower security deposits on utilities
  • More government benefits
  • Better chances to get a job

The Connection Between Credit Cards and Your Credit

The only way to build credit is to have active credit accounts in your name and to use them responsibly over time. That’s where credit cards come into play.

One of the biggest factors in how credit scores are calculated is called your credit utilization ratio. It only applies to revolving accounts, such as credit cards and lines of credit, which don’t have a fixed term. Credit utilization isn’t measured for installment loans, such as mortgages and car loans, because they do have a set ending or maturity date.Credit utilization is a simple formula that equals your total account balance divided by your total credit limit. For example, if you have a credit card with a balance of $1,000 and a credit limit of $2,000, your utilization ratio is 50% ($1,000 / $2,000 = 0.50).

Keeping a low utilization, such as below 20%, is optimal for good credit. So, by paying down your balance on the card to $400, you could reduce your utilization ratio to 20% ($400 / $2,000 = 0.20) and boost your credit scores.

A low utilization ratio says that you’re using credit responsibly. A high ratio indicates that you may be maxed out and even getting close to missing a payment.

Many people mistakenly believe that getting rid of their credit cards will automatically improve their credit. The surprising truth is that canceling credit cards usually hurts it because your available credit on the card plunges to zero, which instantly increases your utilization and causes your credit scores to drop right away.

However, whether closing a card is right for you really depends on your current and future financial situation. Use the following do and don’ts to know when ditching a card is best and how to do it with minimal damage to your credit.

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Tally Review: Pay off Credit Cards Faster

Tally is an app that simplifies your credit card payments. If you qualify for the line of credit, Tally will make all of your minimum payments on your behalf and then send you one monthly statement. If the line of credit has a lower interest rate than your credit cards you can also consolidate them to Tally.

Laura Adams

About Laura Adams

Laura Adams is a personal finance expert and award-winning author of multiple books, including Money Girl's Smart Moves to Grow Rich. Her most recent title, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, is an Amazon No. 1 New Release. Laura's been the host of Money Girl, the top-rated weekly podcast, since 2008.

Laura is frequently quoted in the national media and has been featured on NBC, CBS, ABC, FOX, Al Jazeera, Bloomberg, NPR, MSN, USA Today, The Wall Street Journal, The New York Times, US News and World Report, Consumer Reports, Forbes, Money Magazine, Kiplinger's Huffington Post, and many other radio, print, and online outlets. Since 2013, she's completed over 1,000 media interviews.

Millions of loyal listeners and readers benefit from her practical advice. Her mission is to help over 100 million students and consumers live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work.

Laura received an MBA from the University of Florida. She lives in Austin, Texas with her husband and their yellow Lab.

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