When Should You Cancel A Credit Card?

Read these tips before cutting up that credit card.

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• Money & Finances: Credit Cards • Money & Finances: How-To
• Money & Finances: Tips & Tricks

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Do you need to rework your finances, or do you just hate your credit card? Think twice before closing it or you might damage your credit score. Below are six common situations where you might want to close your credit card and what to think about before you make your final decision.

High Annual Fee

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With many great credit cards not having an annual fee, you should make sure you're getting your money's worth if you're going to carry a card that has one. For high spenders, the higher rewards or travel perks may be worth it. If not, dumping the card may be the right decision. The good news is that you may not need to affect your credit score at all -- you can almost always ask the issuer to change your card to one that doesn't carry an annual fee. If that doesn't work, you can also try asking them to waive the fee before you close your account.

Unable to Control Spending


People in increasing debt often close their credit cards to keep the debt from adding up. While this will prevent additional spending, it will also wreck your credit score by increasing your utilization ratio, reducing your number of open accounts, and lowering your average account age once the closed cards start to fall off your credit report. You also won't have the credit available in case of a true emergency. Try alternative methods such as freezing your cards in a block of ice to prevent impulse buys before you take the drastic step of closing them.

High Interest Rate


A high interest rate by itself is never a good reason to close a credit card. If you don't carry a balance on the card, you don't need to worry about the interest rate. If you do carry a balance on the card, you'll still have to pay it off at the same interest rate after you close it. In addition, that card's credit limit will report as $0 once closed, and it will show as maxed out until you pay it off. If the high interest is hurting you, find ways to stop spending on that card or transfer the balance to a lower-interest card.

Too Much Credit


Too many credit cards or too much available credit is sometimes a bad thing. If lenders think you have too much credit in relation to your income, they'll think it's too risky to approve you for new credit cards or other types of loans. The most common situation where people find themselves with too much available credit is when they've opened up a large number of store cards. If you have been denied credit due to too much available credit, close the cards that give you the worst benefits -- just make sure you've paid them off first.

You Want the Signup Bonus Again


A growing number of people are opening up numerous credit cards just to get the signup bonuses and then closing them to get a bonus from another card or even the same card. Many of these bonuses are very tempting with values of several hundred dollars cash back or enough frequent flyer miles to pay for a vacation. However, banks are onto this game and are working to make sure the bonuses only go to customers who are actually looking to build a relationship with the bank. Many are now limiting the bonuses to once per lifetime and are also denying credit card applications by customers who show a history of bonus chasing.

Poor Customer Service


Poor customer service is usually a great reason to close a credit card. Just make sure you consider the effect on your credit score. An older card is fine to close despite popular myths to the contrary because its age will still report on your credit report for ten years after closing it. A card with a high limit in relation to your total available limits or one where you are still paying off the balance may not be one to close right away. Remember, there's other ways to get back at a credit card company by costing them money in ways like only using the card for high cash back categories or asking for paper statements. To minimize the effect on your credit score of a falling out with a bank, plan ahead by having multiple credit cards from different banks.
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