Maximizing Home Equity: The Ins and Outs of Cash-Out Refinancing

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Understanding the Impact of Closing a Credit Card

At O1ne Mortgage, we prioritize educating our clients about consumer credit and finance. This article aims to provide an objective view to help you make informed decisions regarding your credit cards. For any mortgage service needs, feel free to call us at 213-732-3074.

How Closing a Credit Card Affects Your Credit

Closing a credit card can be tempting for various reasons, such as avoiding annual fees or reducing the temptation to overspend. However, it’s essential to understand how this action can impact your credit score.

Increases Your Credit Utilization Ratio

When you close a credit card, you lose the available credit on that account, which increases your overall credit utilization ratio. This ratio is a significant factor in your credit score. A higher utilization rate can negatively impact your credit score.

Example:

• Card A: $10,000 balance, $15,000 limit
• Card B: $2,000 balance, $25,000 limit

With both cards, your utilization rate is 30%. Closing Card B increases it to 67%, which could harm your credit.

Lowers Your Average Age of Accounts

The length of your credit history contributes to 15% of your credit score. Closing an older account can reduce your average account age, potentially lowering your score.

Example:

• Card A: 15 years old
• Card B: 5 years old

Closing Card A reduces your average account age from 10 years to 5 years.

Reduces Your Credit Mix

A diverse credit mix, including both installment loans and revolving credit, accounts for 10% of your credit score. Closing a credit card can reduce this diversity, slightly impacting your score.

Example:

• Credit card, student loans, car loan

Canceling the credit card leaves only installment loans, reducing your credit mix.

Deciding When to Keep or Close a Credit Card

Weighing the pros and cons can help you decide whether to keep or close a credit card.

When to Keep a Credit Card Open

• It’s your oldest account.
• You have few other credit accounts.
• Closing it would significantly raise your credit utilization rate.
• The account is in good standing.

When to Close a Credit Card

• High annual fees with minimal benefits.
• High-interest rates and carrying a balance.
• Struggling to manage debt.
• Temptation to overspend.
• Desire for better rewards.

Alternatives to Canceling a Credit Card

If you’re considering keeping your card to maintain your credit, here are some alternatives:

• Ask for a fee waiver: Contact your issuer to request a reduction or waiver of the annual fee.
• Downgrade your card: Switch to a different card with no annual fee while keeping your account history.
• Add a recurring payment: Set up a small recurring charge to keep the account active.
• Put the card away: Store it securely to avoid overspending.

How to Close a Credit Card Safely

If you decide to close your credit card, follow these steps:

1. Pay off your balance: Clear any remaining balance before canceling.
2. Use or transfer rewards: Redeem or transfer any outstanding rewards.
3. Update recurring payments: Switch automatic payments to a different account.
4. Contact your issuer: Request account closure and ask for written confirmation.
5. Destroy the old card: Shred or cut up the card thoroughly.
6. Check your credit report: Ensure the account is marked as closed by you.

Frequently Asked Questions

• How long does a closed credit card remain on my credit report?
• What happens if you don’t use your credit card?
• Can I reopen a closed credit card?

The Bottom Line

Closing a credit card is a significant decision that can impact your credit score. Consider alternatives and monitor your credit report after closing an account. For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make the best financial decisions.

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