If you've been thinking about canceling a credit card, it’s critical to understand how it will affect your entire financial life.

19 minute read

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Hey everyone. Thanks for downloading another weekly episode of the money girl podcast. My name is Laura Adams. I’m a personal finance expert, author speaker, and consumer advocate. My mission is to give you the knowledge, resources, and motivation to manage money the best way possible and create a richer life. I hope you’re doing okay. And you’re able to get outside and enjoy the summer weather wherever you are. Many people have told me that they’ve been listening to more audio and listening to more podcasts during their runs and walks during the pandemic. If you’re one of them, if you’ve really been enjoying the show, I’d love it. If you would take just a moment to rate and review it on Apple podcasts, your ratings and reviews may not seem like much, but they really do help us stay visible. So new listeners can find the show and I can help them get the inspiration and information they need right now.

So not only are you helping me in the quick and dirty tips network, but I think you’re helping other people by allowing them to find the show. So I’ll say thank you in advance for taking a moment to do that this week, I’m pulling a show out of the archives for you about smart ways to manage your credit cards. I’ve recently been asked a few times about the consequences of canceling cards. So this is something that’s obviously on people’s minds right now. So I hope you will enjoy this episode and I’ll be back next week with a new show. Today’s show is for you. If you have a credit card and you also want to have great credit, which I would think is probably the majority of listeners, this topic was inspired by a great question from Maria. Oh, she says I’m a huge fan of the money girl podcast.

And I’m also a get out of debt, fast student. I’ve taken your financial advice. And I’m glad to say that my husband and I are in a much better financial situation. Now we both have travel rewards credit cards with zero balances that we have not used in over a year. We know that canceling cards isn’t advisable, but we really want to stop paying the $95 annual fee. My husband’s credit score is seven 80 and mine is eight 18. What do you recommend, Maria? Thanks so much for your question and being a part of the money girl, community. She actually sent a second question as well, and we’ll get to that one at the end of the show. So that’ll be a surprise bonus question for you before you cancel a credit card. It is critical to understand how it’s going to affect your entire financial life.

Whether you should get rid of a card, depends on a variety of factors like your current financial situation and your future financial goals. So in this show, what I’m going to do is cover 10 do’s and don’ts for when to cancel a card. And I think after we go through these, there’ll be five dues and five don’ts. I think you’ll have a better feel for how to manage your credit card accounts wisely so that they improve your finances and do not hurt them. You’ll find the notes for this and every show with links to free resources that I mentioned and the full archive of podcasts over in the money girl section@quickanddirtytips.com. This is episode number 546 when to cancel a credit card, 10 do’s and don’ts to follow okay. Before I cover each of the do’s and don’ts, I’m going to go through an overview of why building good credit and using credit cards the right way is so important in the first place.

You probably know that 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 and the three major bureaus right now are Equifax, Experian and TransUnion, different credit scoring models use that data that’s in your history to calculate credit scores. And so those scores kind of act like a shortcut for various businesses that want to evaluate you quickly. And 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. And 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, any type of loan that you apply for, for instance, paying just 1% less for a mortgage because you have good credit.

Instead of average credit could save you over a hundred thousand dollars on the cost of a 30 year fixed rate loan, depending on the total amount you borrow, we’re talking about real money here. However, even if you never borrow money to finance a home or to charge a vacation to a credit card, having good credit gives you many other significant money saving benefits. So I want to repeat that even if you never borrow money, you say, Laura, I don’t want a mortgage. I don’t want to finance a car. I’m only going to pay cash. I don’t have any need to borrow money. Even if you never borrow money, having good credit is going to save you money in other ways. So here are some of the ways that that happens when you have better credit, you get lower auto insurance premiums. In most States, there are about three States that do not allow credit to be a factor, but 47 States do when you have good credit.

You’re also going to qualify for lower home insurance premiums. Again, in most States, if you’ve got good credit, you’re going to have more opportunities to rent a home or an apartment. You’re going to also get lower security deposits on utilities. You can qualify for more government benefits. There are certain benefits that do require you to have good credit and you have better chances to get a job more and more employers are looking at credit as one of the criteria for hiring you. So these are all really significant ways that your finances are impacted. So credit is something that affects your entire financial life. So how do you get good credit? Well, the only way to build credit is to have active credit accounts in your name and to use them responsibly over time. So this is where credit cards come into play as a really powerful tool for building credit.

One of the biggest factors and how credit scores are calculated is called your credit utilization ratio. If you’ve been listening to this show for awhile, you’ve definitely heard me talk about credit utilization before it only applies to revolving accounts. These are credit cards and lines of credit that stay open indefinitely. They don’t have a fixed term like a 30 year mortgage or a five year auto loan. And credit utilization is not measured for installment loans like mortgages and car loans because they do have a set ending or a maturity date. So credit utilization is a simple formula that equals your total account balance. These are on again, your revolving accounts, your total account balance divided by your total credit limit. For example, if you’ve got a credit card with a balance of a thousand dollars, so you’ve made a thousand dollars in purchases and you’ve got a credit limit of 2000.

So that’s where you max out. That means your credit utilization ratio is 50%. So you’ve got a thousand dollars divided by $2,000 equals 0.5 or 50%. And by the way, that’s too high. You definitely want a utilization lower than that. Keeping a low utilization. I’m going to say somewhere around 20%, maybe 25% is optimal for good credit. So if you had this credit card, in my example, if you were to pay down your balance on the card from a thousand down to 400, you could reduce your utilization ratio down to 20%. So 400 divided by $2,000 credit limit is 0.2 or 20% that would boost your credit scores. So a low utilization is good because it says that you’re using credit responsibly and a high ratio indicates that you may be maxed out and you may be even getting close to missing a payment. Many people mistakenly believe that getting rid of their credit cards will automatically improve their credit.

And the surprising truth is that canceling credit cards usually hurts your credit because your available credit on the card automatically plunges to zero. So maybe you had a couple thousand of available credit. You close the account and now you’ve got a zero available credit, but you still owe a thousand dollars on the card. So that instantly increases your utilization, which causes your credit scores to drop right away. However, whether closing a card is right for you really depends on your current and your future financial situation. So let’s go through the do’s and don’ts so that you’ll know when ditching a card is best. And if you do it, how to do it with minimal damage to your credit, the first one is do cancel credit cards that are a net loss. So if you’re like Maria and you’ve got great credit, but you’ve got an unused card that’s costing you money.

You may want to consider canceling it, but definitely listen to the rest of this podcast. Before you make that decision. Many rewards cards come with an annual fee, especially when they offer cash back airline miles or points for merchandise. Now, in some cases using the rewards easily offsets the annual fee. I’ve got lots of rewards cards that I use, and they are more than paying for themselves. Even though I’ve got some that charge like $500 a year in annual fee, mom, Maya Amex platinum card that I’m getting that much or more in rewards value each year. So I keep it. However, if you won’t use the card or you can’t afford the annual fee, common sense should be the deciding factor, not your credit score. However, one option is to replace a card that charges an annual fee with another card that doesn’t ideally do that before you cancel the first card.

So that would allow you to swap out one credit limit for another one and avoid any damage to your credit number, to do cancel credit cards that tipped you to overspend. So I also don’t recommend keeping a credit card. If it tempts you to overspend and get into financial trouble, taking a temporary hit to your credit, to cancel the card might be worth it to prevent bigger problems in your financial life. So this is one of those areas where you just have to know yourself and know what your weaknesses are. Number three, do cancel credit cards to simplify your financial life. If you’ve payments or you just can’t keep up with transactions because you’ve got too many credit cards, it might be worth it to strategically cancel one or more credit cards. Keep listening for tips. I’ll give you some tips on how to minimize the potential damage.

If you do decide to cancel a card or to number four, do cancel credit cards with low credit limits. First, if you cancel a credit card, choosing one with a higher credit limit poses, more of a threat than getting rid of one with a smaller available limit. That’s because the lower your credit limit on the card, the less closing it could negatively affect your credit. As I previously mentioned for optimal credit, it’s best to never carry a balance that exceeds 20% of your available credit limit. So the more available credit you keep, the more likely you are to have a low utilization ratio. And if you’re not sure what your credit limits are right now, you can review them by getting a free copy of your credit report. Number five, do cancel credit cards. You recently opened by mistake. A common credit dilemma that I hear is Laura, what do I do?

I just opened a credit card at a retail store that I really didn’t want, but I got talked into it. So this can happen. If you feel pressured at a retail store, sales clerks are incentivized for selling these cards. So they make it seem like you’re just going to get the hugest discount on the face of the earth when you open a new credit card at their store. And a lot of times that can just sound too good to pass up. And in some cases you may not even realize that what you’re signing up for is actually a credit card. If you are loyal to a store and you do make frequent purchases, they’re having it’s branded credit card. That may make sense. It can give you some nice savings and some promotional benefits that make it worthwhile. You cannot erase the fact that that card did show up on your credit history.

If you opened a card, it’s definitely there, but if you decide that you’d rather not have the account closing it sooner, rather than later is better for your credit. Okay? Now we’re going to switch gears and talk about the don’ts. But first let’s take a short break to thank the sponsors who help keep money. Girl going before I go on, I want to tell you about today’s sponsor indeed for any business. The next step you make is the most important one, like hiring someone who can make a real impact. Indeed helps you find high impact hires faster without any longterm contracts. And you pay only for what you need, thanks to their super flexible payment options. So why not take that next step with indeed get started with a free $75 credit for your first job post to get in front of great candidates today, go to indeed.com/money. Girl that’s indeed.com money girl terms and conditions apply offer valid through September 30th.

Bank of America is hiring and looking to support local communities. Working for bank of America is more than just a job. They offer growth opportunities, support, training, and resources to help you create a long lasting career path like their award-winning Academy and organization that ensures your success through coaching and development. The Academy can help you learn about your professional interests and expose you to new opportunities. They set you up to thrive both today and in the future, they also offer financial advisor development programs designed to support and nurture your growth in the field. And you don’t need a finance background, whether you’re starting out in your career, you’re looking to transition into financial services or your a seasoned advisor. The advisor development program gives you the right mix of coursework and on the job training to ensure success. Bank of America is not only invested in your career. They’re invested in you. Your health and safety are their number one priority. Visit careers dot B of a.com/money girl for your next career. Move that’s careers dot B of a.com/money girl.

Okay, now we’re into the don’ts number six is don’t cancel your only credit card. In addition to maintaining low credit utilization, the health of your credit depends on having a mix of credit accounts that shows that you can handle different types of credit, like installment loans and revolving accounts. But if you cancel your only credit card that would leave you deficient in the revolving credit category, therefore, I don’t recommend canceling a credit card. If it’s your only credit card, having at least one card in the mix rounds out your credit file. Ideally you would have a total of two, maybe three credit cards that come from different issuers like visa, MasterCard, American express, or discover. If you have more than one line of credit or more than one credit card, most credit scoring models calculate your utilization ratio for each account and collectively on all your accounts.

So it’s better to spread out your balances on multiple credit cards and maintain low utilization on each of them than it is to have one card that you just charged to limit. And max out, depending on the types of charges you make, you may need a low rate card for times when you must carry a balance and higher rate rewards cards for charges that you always pay off each month. That’s what I do. I have a variety of types of cards based on the types of purchases that I make. And certainly no annual fee cards are best, but as I previously mentioned, rewards cards that come with a fee may be worth it depending on if you’re really utilizing that those rewards or not. Number seven, don’t cancel credit cards you’ve had for a long time as if credit utilization and having a mix of credit accounts.

Weren’t enough, a canceled credit card hurts your credit in other ways, too. Another factor that’s used in calculating credit scores is how long you’ve had credit accounts. Having a long rich credit history, boost your scores and makes you appear less risky to potential lenders and merchants canceling a longstanding credit card causes your average age of credit history to decrease, which hurts your credit. So value cards that you’ve had for a long time, more than those that you recently opened. Number eight, don’t cancel multiple cards at the same time. If you have more than one credit card that you do want to cancel, don’t shut them all down at the exact same time. It’s better to space out cancellations over time, such as one, every six months in order to minimize the damage to your credit health. Number nine, don’t cancel credit cards. If you’re planning to make a big purchase, this is really important.

If you’re planning to finance a big purchase, like a home or a vehicle in the next three to six months, it is not wise to cancel any of your credit cards. If you were to cancel them and your utilization rate were to go up and your credit scores were to go down during the application process, you could ruin your chances for getting a low interest loan. Now, Maria did not mention if she’s looking to use her great credit to borrow money anytime soon, but it’s definitely an important issue that I would recommend. She consider number 10, don’t cancel credit cards because you’ve made late payments. A lot of people think, Oh, if I just cancel this credit card, it’ll go away. And no one will know that I made any late payments. That’s not how it works. Unfortunately, never cancel a credit card with negative information like late payments, or maybe you’ve gotten into collections thinking that it will disappear from your credit file.

All credit accounts, stay on your credit reports for seven years from the date you became delinquent, even after you or a card issuer closes the account and accounts with only positive information remain in your credit file longer. They stay for up to 10 years. If you or Maria, go through these do’s and don’ts and you decide that it’s better not to cancel a credit card. You want to use that card occasionally to make small purchases that you pay off in full that keeps it active and allows you to continue adding positive information to your credit history. However, I do not recommend keeping a credit card that you’re not using responsibly, or that’s tempting you to overspend taking a temporary hit to your credit might be worth it in the long run to prevent bigger problems in your financial life. Thank you, Maria, for your questions.

I mentioned that she sent in a second question. She says I’ve been married for six years and have been hesitant to change my last name. I’m afraid this will affect my credit score. I worked really hard over the years to build it. I’ve listened to your podcast on this topic, but I still can’t make a decision. What do you recommend? Well, Maria, your credit is tracked by your social security number. So even changing your last name does not change anything with your credit. You always have credit in your own name based on your social security number. So don’t worry. It won’t erase any of that hard work that you’ve put into your great credit score. Thanks again to Maria for sending in the question. If you also have a money question or just an idea for a future show topic, I would love to hear it. You can call it in. You can leave a message at (302) 364-0308, or you can send me an email by visiting my contactPage@lauradadams.com. That’s all for now. I’ll talk to you next week until then here’s to living a richer life. Money girl is produced by the audio wizard, Steve Ricky Berg with editorial support from Karen Hertzberg. As I mentioned at the top, if you’ve been enjoying the podcast, please rate and review it. You might also like the backlist episodes and show notes that are always available@quickanddirtytips.com

Maria O. says:

I’m a huge fan of the Money Girl Podcast and am also a Get Out of Debt Fast student. I’ve taken your financial advice and am glad to say that my husband and I are in a much better financial situation now.

We both have travel rewards credit cards with zero balances that we haven’t used in over a year. We know that canceling cards isn’t advisable, but we really want to stop paying the $95 annual fee. My husband’s credit score is 780 and mine is 818. What do you recommend?

Maria, thanks so much for your question and for being a part of the Money Girl community!

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

RELATED: 12 Credit Myths and Truths You Should Know

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.

RELATED: 5 Ways to Get a Loan With Bad Credit

10 do’s and don’ts for when to cancel a credit card

1. Do cancel credit cards that are a net loss

If you’re like Maria and have great credit with an unused card that’s costing you money, you may want to consider canceling it. Many rewards cards come with an annual fee, especially when they offer cashback, airline miles, or points for merchandise. In some cases, using the rewards easily offsets the annual fee.

However, if you won’t use the card or can’t afford the annual fee, common sense should be the deciding factor, not your credit score. However, one option is to replace a card that charges an annual fee with another card that doesn’t, ideally before you cancel the first one. That allows you to swap out one credit limit for another one and avoid any damage to your credit.

2. Do cancel credit cards that tempt you to overspend

I also don’t recommend keeping a credit card if it tempts you to overspend. Taking a temporary hit to your credit might be worth it to prevent bigger problems in your financial life.

3. Do cancel credit cards to simplify your financial life

If you’ve missed payments or can’t keep up with transactions because you have too many cards, it might be worth it to strategically cancel one or more credit cards. Keep reading for tips to minimize the potential damage to your credit.

4. Do cancel credit cards with low credit limits first

If you cancel a credit card, choosing one with a higher credit limit poses more of a threat than getting rid of one with a smaller limit. The lower your credit limit on a card, the less closing it could negatively affect your credit.

As I previously mentioned, for optimal credit, it’s best to never carry a balance that exceeds 20% of your available credit limit. If you’re not sure what your credit limits are, you can review them by getting a free copy of your credit report at annualcreditreport.com.

5. Do cancel credit cards you recently opened by mistake

A common credit dilemma is what to do after opening a new credit card that you felt pressured into at a retail store. Sales clerks make getting a huge discount with a new card signup sound too good to pass up. In some cases, you may not even realize that what you’re signing up for is a credit card.

If you’re loyal to a store and make frequent purchases there, having its branded credit card can give you nice savings and promotional benefits that make it worthwhile. While you can’t erase the card from your credit history, if you decide that you’d rather not have the account, closing it sooner rather than later is better for your credit.

Free Resource: Credit Score Survival Kit – a video tutorial, e-book, and audiobook to help build credit fast!

6. Don’t cancel your only credit card

In addition to maintaining low credit utilization, the health of your credit depends on having a mix of credit accounts. That shows you can handle different types of credit, such as installment loans and revolving accounts. But if you cancel your only credit card, that would leave you deficient in the revolving credit category.

Therefore, I don’t recommend canceling a credit card if it’s your only one. Having at least one card in the mix rounds out your credit file. Ideally, you would have a total of two or three cards that come from different issuers, such as Visa, Mastercard, American Express, or Discover.

If you have more than one line of credit or credit card, most credit scoring models calculate your utilization ratio for each account and collectively on all your accounts. So, it’s better to spread out your balances on multiple cards and maintain low utilization on each of them, rather than have one card that you charge to the limit.

Depending on the types of charges you make, you may need a low-rate card for times when you must carry a balance and a higher-rate rewards card for charges that you always pay off each month. No annual fee cards are best, but as I previously mentioned, rewards cards that come with a fee may be worth it.

7. Don’t cancel credit cards you’ve had for a long time

As if credit utilization and having a mix of credit accounts weren’t enough, a canceled credit card hurts your credit in other ways. Another factor that’s used in calculating credit scores is how long you’ve had credit accounts.

Having a long, rich credit history boosts your scores and makes you appear less risky to potential lenders and merchants. Canceling a long-standing credit card causes your average age of credit history to decrease, which hurts your credit. So, value credit cards that you’ve had for a long time more than those you’ve recently opened.

8. Don’t cancel multiple cards at the same time

If you have more than one credit card that you want to cancel, don’t shut them all down at the exact same time. It’s better to space out cancellations over time, such as one every six months, to minimize the damage to your credit health.

9. Don’t cancel credit cards if you’re planning to make a big purchase

If you’re planning to finance a big purchase, such as a home or vehicle, in the next three to six months, it’s not wise to cancel any credit cards. If your utilization rate increases and your credit scores suddenly take a dive during the application process, you may ruin your chances of getting a low-interest loan.

Maria didn’t mention if she’s looking to use her great credit to borrow money any time soon. But it’s an important issue that I recommend she consider.

10. Don’t cancel credit cards because you’ve made late payments

Never cancel a credit card with negative information, such as late payments or being in collections, thinking that it will disappear from your credit file. All credit accounts stay on your credit report for seven years from the date you became delinquent, even after you or a card issuer closes it. Accounts with only positive information remain in your credit file longer, for up to 10 years

What should you do with unused credit cards?

If you or Maria go through these dos and don’ts and decide that it’s better not to cancel a credit card, use it occasionally to make small purchases that you pay off in full. That keeps it active and allows you to continue adding positive information to your credit history.

However, I don’t recommend keeping a credit card that you’re not using responsibly or that tempts you to overspend. Taking a temporary hit to your credit might be worth it to prevent bigger problems in your financial life.

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About the Author

Laura Adams, Quick and Dirty Tips

Laura Adams, Quick and Dirty Tips

Laura Adams is an award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. Her newest 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 writer and host of the popular Money Girl Podcast, a top weekly audio show in Apple Podcasts, since 2008. She’s a frequent source for the national media and has been featured on most major news outlets including NBC, CBS, ABC FOX, Bloomberg, NPR, The New York Times, The Wall Street Journal, The Washington Post, Money, Time, Kiplinger’s, USA Today, U.S News, Huffington Post, Marketplace, Forbes, Fortune, Consumer Reports, MSN, and many other radio, print, and online publications. Millions of readers and listeners benefit from her practical financial advice. Her mission is to empower consumers to live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work. Laura received an MBA from the University of Florida. Visit LauraDAdams.com to learn more and connect with her.

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