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Think about potential consequences before you cancel a credit card

Do some research before canceling your card.

Oct. 22, 2018

Sometimes there's good reason for canceling a credit card account. Maybe the card has a high annual fee or you’re getting divorced and want to shut down joint accounts.

If there’s not a good reason, you need to consider the consequences of doing that because closing the account will most likely have a negative impact on your credit score.

That's because the algorithms used to create a credit score consider your credit utilization – how much of your available credit you’re using.

Add up the balances on all your credit cards and divide that by the total of all the credit limits on those cards. That’s your credit utilization rate. Anything over 30 percent could hurt your score.

Cancel the card and your available credit gets smaller. Even if you don't make any more purchases, by losing the credit you had on that card you cancel will cause your credit utilization to go up which could make your score go down.

Here’s the math: If the total credit on all your credit cards is $10,000 and you’re carrying a balance of $3,000, that’s a 30 percent utilization rate. If the credit card you cancel has a $5,000 credit limit and your balance remains the same ($3,000) your available credit drops to $5,000 and your credit utilization will shoot up to 60 percent.

Consumer Reports suggests a better move: Unless the card has an annual fee, keep the account open, just don't use the card.

More Info: How to Cancel Your Credit Card

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