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Do you remember the excitement around your first credit card? You probably applied for a credit card when you went to college, or maybe your parents gave you some advice. Either way, you’ve had that card since your teens or early 20s and it probably isn’t the biggest card in your wallet. It may have a higher interest rate, no rewards, or a higher annual fee.
Once you start building good credit, you are offered better credit cards. Your interest rates are lower, you probably don’t have an annual fee or it’s a low fee, and you probably have access to airline miles or cash back rewards. So, why keep a card that is no longer serving you?
How will closing accounts affect my credit?
The important thing to remember is that when you decide to close a credit card account, you are lowering your credit utilization rate. Remember that credit utilization is 30 percent of your overall score calculation. You’ll need to curtail your spending habits when you close a credit card account or you’re more likely to exceed the recommended 30 percent utilization rate, causing your credit score to take a nose dive.
The average age of your credit accounts is another important factor in your credit score. It is twofold. If you’re new to credit, it’s best to keep older cards open because they stay on your credit for up to 10 years. That card, although rarely used, is actually helping your credit – especially if you have a good payment history. Closing it can do far more damage to your credit than someone who has been building their credit for over a decade.
So what can I do?
If your interest rate is high or the annual fee is too high, try negotiating with your credit card provider. Sometimes if you tell them you are considering canceling the card due to high fees etc, they may work with you. Getting a new customer costs them far more money than waiving your annual fee or lowering your interest rate.
Sometimes you have to close a card. If it’s costing you money because the credit card company can’t negotiate a discount or lower annual fee, there’s no point in keeping it. Your credit may take a hit, but it will recover. However, you can’t recover the money lost because of the annual fee for a card you don’t use.
Credit account closure should not be taken lightly. Be sure to consider the factors listed above before closing your accounts.
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