Credit cards are a convenient way to make purchases and build credit history. However, there is a common misconception that cancelling a credit card can negatively impact your credit score. In this article, we will delve into the topic of whether it is bad to keep cancelling credit cards and provide insights on how it affects your financial health.
Firstly, let's clarify what happens when you cancel a credit card. When you close a credit card account, the issuer sends a notice to the three major credit reporting agencies (Equifax, Experian, and TransUnion) to update your credit file. This action typically results in a "soft delete," which means the account is removed from your credit report but may still appear for up to 180 days. During this period, the account could affect your credit score if it has a significant balance or high credit limit. After 180 days, the account should be completely removed from your credit report, and any associated debt should also be reported as paid.
Now, let's discuss the implications of frequently canceling credit cards. The frequency of closing accounts can be viewed as a sign of financial instability or irresponsibility by lenders. If you have a history of opening and closing credit cards frequently, it might raise red flags for potential lenders who may view it as a risky behavior. However, it's essential to note that not all credit card cancellations are viewed negatively. Closing an old credit card that you no longer use or one with a high annual fee can actually be beneficial for your credit score if it was contributing to your utilization ratio.
One key factor to consider is the impact on your credit utilization ratio. Your credit utilization ratio is the amount of credit you use compared to your total available credit. A high utilization ratio can lower your credit score, while a low ratio can improve it. If you frequently cancel credit cards, especially those with large credit limits, it could result in a higher utilization ratio, which could harm your score. On the other hand, if you close a card with a high annual fee and replace it with a more affordable option, it could help reduce your overall credit utilization and improve your score.
Another aspect to consider is the impact on your credit history. Each time you apply for a new credit card, the lender checks your credit history to determine your creditworthiness. If you have a history of frequent cancellations, it could indicate that you are unable to manage your credit responsibly, which could hurt your chances of getting approved for future credit. However, if you have a consistent history of responsible credit management, even with some cancellations, it could actually benefit you in the long run.
Lastly, it's important to understand that cancelling a credit card does not immediately affect your credit score. The most immediate impact occurs when the account is first reported as closed to the credit bureaus. During this period, the account could temporarily lower your available credit and potentially increase your utilization ratio, which could affect your score. However, after 180 days, the account should be removed from your credit report, and any associated debt should also be reported as paid. At that point, the impact on your score would depend on the overall health of your credit profile.
In conclusion, while cancelling credit cards can have an impact on your credit score and credit history, it is not inherently bad to do so. The key is to manage your credit responsibly and avoid unnecessary cancellations. If you find that you are constantly closing cards due to high fees or lack of usage, consider alternatives such as downgrading to a less expensive card or seeking out a better-suited product. Conversely, if you have a card with a high balance or high interest rate, it might be beneficial to close it and replace it with a more cost-effective option. Always consult with a financial advisor or credit counselor before making any major decisions related to your credit cards.