Credit cards are a convenient way to make purchases and build credit history, but with the rise of digital wallets and other payment methods, many consumers find themselves with unused or underutilized credit cards. When this happens, some people choose to cancel their credit card altogether, while others let it close on its own. Both options have their pros and cons, and the decision often depends on individual circumstances. In this article, we will explore whether it is better to cancel a credit card or let it close, and provide insights into the factors that might influence your choice.
Cancelling a credit card can be a straightforward process that involves contacting the issuer and requesting the cancellation. Once the card is cancelled, it cannot be used for making transactions, and any outstanding balances are usually written off. Some card issuers may also charge an early cancellation fee, which could range from $0 to several hundred dollars depending on the terms of the card. Cancelling a credit card can result in a negative impact on your credit score if you have a high credit utilization ratio, as it reduces the amount of available credit you have. However, if you have a low credit utilization ratio, cancelling a card might not significantly affect your score.
On the other hand, letting a credit card close on its own means that the issuer will automatically close the account after a certain period of inactivity. This period can vary from six months to two years, depending on the card issuer's policy. When a card is closed, any outstanding balances are typically written off, and the cardholder loses access to the card and any associated benefits. Closing a credit card can also result in a hit to your credit score, especially if you have a low credit utilization ratio. However, if you have a high credit utilization ratio, closing a card might not have a significant impact on your score.
When deciding whether to cancel a credit card or let it close, there are several factors to consider:
1. Credit Utilization Ratio: Your credit utilization ratio is the percentage of your total available credit that you are using. If you have a high credit utilization ratio, cancelling a card could help reduce your ratio and improve your credit score. On the other hand, if you have a low credit utilization ratio, closing a card might not have a significant impact on your score.
2. Outstanding Balances: If you have outstanding balances on your credit card, cancelling the card could result in those balances being written off, potentially reducing your debt and improving your credit score. However, if you let the card close on its own, you might still have to pay off the balance, which could result in additional fees and penalties.
3. Credit Score: Both cancelling a card and letting it close can affect your credit score, but the impact depends on your current credit utilization ratio. If you have a high ratio, cancelling a card could help improve your score. If you have a low ratio, closing a card might not have a significant impact.
4. Financial Situation: If you are facing financial difficulties and need to reduce debt, cancelling a card might be more beneficial than letting it close. However, if you have a good handle on your finances and do not need the card, letting it close might be the better option.
5. Card Benefits: Some credit cards offer rewards programs, travel benefits, or other perks that might be valuable to you. If these benefits are important to you, keeping the card open might be more advantageous than cancelling it.
In conclusion, whether it is better to cancel a credit card or let it close depends on various factors such as your credit utilization ratio, outstanding balances, credit score, financial situation, and card benefits. It is essential to evaluate your individual circumstances and make an informed decision based on your needs and goals. If you are unsure about whether to cancel or let your card close, consulting with a financial advisor or credit counselor can provide guidance tailored to your specific situation.