When it comes to cancelling a credit card, there are two sides to every coin. This section will go over the drawbacks of cancelling a credit card.
Credit Timeline Has Been Reduced
Credit card usage is closely monitored by the authorities who determine your credit score. Closing a credit card reduces your overall credit history, which has a negative impact on your credit rating and score.
When calculating your credit score, credit bureaus look at the length of your credit history. By cancelling a credit card that you’ve had for a long time, you can reduce your credit history. This has an adverse effect on your credit score, causing it to fall.
Many cardholders mistakenly believe that cancelling a card with late payments deletes the late payment record associated with the card immediately. No way! Even if you close a credit card, late or missed payments are still considered when calculating your credit score.
Credit Limits Have Been Reduced
A user’s total available credit limit would be the sum of separate credit limits from multiple cards. When a cardholder cancels one of their credit cards, their overall credit limit is reduced, and other benefits like cashback, incentives, and loyalty points are no longer available.
You lose access to the rewards, loyalty points, and other benefits that come with a credit card when you close it.Along with losing these benefits, your overall credit limit is reduced.
As a result, your credit score will suffer.
Closing a credit card account may aid in debt repayment in the long run, but it will harm your credit score in the short term. Your credit history and overall credit limit play a large role in determining your credit score. When you close a few credit cards, your total credit limit decreases, raising your credit usage ratio. If you have a high credit utilisation ratio, your credit score will suffer.
Another option is to keep your cards open but with no balance.
Conclusion
Closing a credit card to save money or manage debt is a decision that should be made only after a thorough examination of your financial circumstances.
As a result, instead of cancelling a card, pay off any outstanding balances and keep it open but inactive. In this manner, the card remains on your credit history and serves as evidence of your ability to effectively manage credit. This helps to build your credit profile and score.
While cancelling a credit card can give you peace of mind, it can also harm your credit score. So, before you sign a credit card, weigh the benefits and drawbacks. If you decide to close a couple of cards, close the newly opened cards first. This will keep you from completely erasing your credit history.
