While credit cards often get a bad rap, they’re powerful tools that can improve your financial life. Yes, mismanaging them can hurt you, but the upsides to using cards responsibly — such as building credit, racking up rewards and making convenient purchases — usually outweigh the downsides.
If you’re thinking about closing a credit card because you don’t want the temptation to use it, or you want to swap it out for a better card, it’s important to understand how it can affect your finances.
Click to read more about how to close a credit card without hurting your credit score.
Many people mistakenly believe that getting rid of credit cards will automatically improve their credit. The surprising truth is that canceling cards usually hurts you, especially in a quest to build credit. Here are five cards that I would never close and you might want to think twice about, too.
1. Credit Cards With a High Credit Limit
How much available credit you use is known as your credit utilization ratio. It’s a major factor in how your credit scores are calculated. For example, if you have a card with a $2,000 limit and a $1,000 balance, your utilization is 50 percent. Keeping your ratio below 20 percent is optimal for maintaining good credit scores. Low utilization shows that you can manage a card responsibly, and high utilization indicates that you may be maxed out and even getting close to missing a payment.
When you close a card, your available credit on the account plunges to zero. That instantly increases your utilization and causes your credit scores to take a dive. So, if you are canceling a card, choosing to one with a smaller credit limit is generally less harmful to your credit than shutting down one with a larger limit.
More on Credit: 26 Things You Need to Know to Build Credit
2. Credit Cards You’ve Owned for a Long Time
Having a long, rich credit history boosts your credit scores and makes you appear less risky to potential lenders and merchants. Canceling a long-standing credit card causes your average age of credit to decrease, which hurts your credit. It’s best to keep these open, if possible.
3. Your Only Credit Card
Your credit health depends on having a mix of revolving accounts (such as credit cards and lines of credit) and installment loans (such as mortgages, auto and personal loans) that you handle responsibly. If you cancel your only credit card, that would leave you deficient in the revolving category. Having at least one credit card rounds out your credit file.
Also, it’s better to spread out balances on multiple cards and maintain a low utilization on each of them, than to charge more to one in particular.
4. Multiple Credit Cards at the Same Time
If you have more than one credit card that you want to cancel, don’t close all of them at the exact same time. It’s better to space out cancelations (for instance, one every six months) in order to minimize the damage to your credit.
Related: Is It Bad to Close a Bank Account?
5. Credit Cards With Late Payments
Never cancel a credit card with negative information, such as late payments or being in collections, because you believe it will disappear from your credit history. That’s wishful thinking. Credit accounts stay on your credit file for seven years from the date you became delinquent, even after you close them.
Should You Close a Credit Card?
Whether closing a card is right for you depends on your financial goals. For me, keeping a variety of cards has been a successful strategy to maintain high credit scores. If you’re trying to build credit or are planning a big purchase soon, such as a home or vehicle, hold on to your cards. If your credit suddenly takes a dive during a loan application, you may ruin your chances for getting a low-interest loan.
Click to read more about how one woman turned her finances around after Amex canceled her card.
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