Your credit score is one of the most important determinants of the interest rate you will be offered for your loans and credit cards. Good credit can fetch you lower interest rates, and credit cards can help you establish and build good credit. However, credit cards are a big responsibility, and when not managed well, it can quickly turn into a nightmare. So you may be tempted to avoid this situation altogether by closing your credit card accounts.
But before you do so, here are some pros and cons to consider:
|Prevents Potential/Further debt- Credit cards, when not handled well, can put you through a vicious cycle of debts. So closing a credit card account is the best possible way to keep a check on unwanted expenditure and avoid resultant debt.
|Erases Credit History- As per the FICO scoring system, a significant percentage of your credit score is attributed to the length of your credit history. When you cancel a credit card which you have held for quite some time, you end up shortening your credit history, while your late payments will continue to be factored in calculating your credit score.
|Averts Identity Theft- Although the chances of identity theft on your credit card maybe slim, an open credit card account that is not being used actively is an unnecessary risk. So canceling credit cards which you no longer use, is definitely an advantage, and especially so if you have been paying an annual fee for the card.
|Loss of Reward Points and Other Benefits- Most credit cards come with reward points or cash back benefits, which you will lose out on when you cancel your credit card.
|Reduces Revolving Debt- An open credit card account means a high amount of revolving debt in your credit report. This may make it harder for you to qualify for loans. So cutting back on the revolving debt improves the chances of approval, and cancelling the credit card may be beneficial for this reason.
|Negative Impact on Credit Utilization Ratio- Since a large percentage of your credit score is derived from the debt-utilization calculation, cancelling your credit card will negatively impact your credit utilization ratio, and reduce your total credit capacity by an amount equal to the limit on your card.
Also Read: Settle Credit Card Debts in 4 Simple Steps
So, before you decide to cancel your credit card, be informed about how this may impact your credit health, so that you’re not in for a surprise. If you still decide to cancel it, make sure you monitor your credit reports to ensure there are no errors.