Let's start with the basics: your credit score. This little number plays a big role in your financial life, as it can impact your ability to get approved for loans, credit cards, and even rentals. One of the main factors that determines your credit score is your credit utilization ratio, which is the amount of credit you're using compared to your total credit limit. When you close a credit card, your total credit limit goes down. This can cause your credit utilization ratio to go up, which can hurt your credit score.
Another factor that affects your credit score is your credit history, or the length of time you've had credit. When you close a credit card, you lose the credit history associated with that account. This can shorten your overall credit history, which can also hurt your credit score. This is especially true when it comes to closing one of your older credit cards.
So what can you do if you have a credit card that you're not using and you don't want to close it? Here are a few options:
1. Keep the credit card open: One option is to simply keep the credit card open, even if you're not using it. If you want to avoid paying the annual fee, try calling the bank directly and ask them if they can waive the fee, or try asking them for a retention offer (e.g. - 10,000 points to keep the card open for another year)
The problem with this option is that if you keep the credit card open, but don't use it often, the bank may close down the credit card due to inactivity which not only is bad for the reasons mentioned above, but now you've got a "closed by issuer" written on your credit report which is a big red flag for banks when you are trying to get approved for a future loan.
That leads us to the second option.
2. Use the credit card monthly: Another option is to use the credit card every month to make a small purchase and paying it off in full. This will help keep the account active and prevent it from being closed due to inactivity.
The only issue is that it can be hard to remember to use your credit card every month. It's especially challenging if you have multiple credit cards that you are trying to keep active on a monthly basis.
That leads us to our final option (hint: it's the best one!)
3. Consider a service like Credicated: If you're worried about forgetting to use your credit card, you can consider a service like Credicated, which will charge your credit card a small fee (less than $1 a month) on a regular basis to keep the account active. This can give you peace of mind and help prevent the account from being closed due to inactivity. Even if you have many credit cards you can sign them up to one of three Credicated plan options (monthly, biannually, and yearly) and you will never have to worry about a credit card being closed again!
Credicated will also help you build credit. Every month that you use your credit card for a small purchase and pay off the balance on time shows the credit bureaus that you borrow money responsibly. Using Credicated helps build your credit score by ensuring you have a low monthly balance on all your credit cards instead of letting them sit unused.
In conclusion, it's generally a good idea to think twice before closing a credit card. Closing a credit card can hurt your credit score, shorten your credit history, and make it harder to get approved for credit in the future. Instead, consider keeping the credit card open, using it occasionally, or using a service like Credicated to keep the account active.
FAQ:
Q: Will closing a credit card hurt my credit score?
A: Yes, closing a credit card can hurt your credit score by decreasing your total credit limit and potentially increasing your credit utilization ratio. It can also shorten your credit history, which can also hurt your credit score.
Q: What happens when I close a credit card?
A: When you close a credit card, you lose the credit history associated with that account and your total credit limit decreases. This can hurt your credit score by potentially increasing your credit utilization ratio and shortening your credit history. It can also make it harder to get approved for credit in the future, as lenders may view you as a higher credit risk with a shorter credit history and a lower total credit limit.
Q: Is it bad to close a credit card?
A: It can be bad to close a credit card, especially if you have a long credit history with the account and a low credit utilization ratio. Closing the credit card can hurt your credit score by decreasing your total credit limit and potentially increasing your credit utilization ratio. It can also shorten your credit history, which can make it harder to get approved for credit in the future.
Q: How often should I use my credit cards to keep them active?
A: To keep your credit cards active, it's generally a good idea to use them at least once every 3-6 months. This will help to prevent the accounts from being closed due to inactivity.
Q: How can I prevent my credit card from being closed due to inactivity?
A: To prevent your credit card from being closed due to inactivity, you can use the credit card occasionally, such as making a small purchase every few months and paying it off in full. You can also consider using a service like Credicated, which will charge your credit card a small fee on a regular basis to keep the account active. Maintaining a low credit utilization ratio can also help to prevent your credit card from being closed due to inactivity.
To learn more about how Credicated can help keep your credit card accounts open and active click here!
