Our last few columns, notably on shopping do's and don'ts and retail cards, sparked questions from LearnVest readers (obviously sick of credit and wanting to be free of plastic!) on how their credit will be affected if they close their cards.
Seeing that the holiday season is peeking around the corner and everyone seems to have shopping on the brain, we have the answers to all of your questions to help you make the right decisions about the future of your credit cards.
Oh no! I just closed a Kohl's charge this summer after having it open for only two months. Is my credit going to take a hit? I'm pretty young, so I don't have a lot of things contributing to my score. – Vicky
Don't fret, Vicky! You can see for yourself if your credit suffered. Credit scores reflect changes usually within a 30-day cycle, so check your credit score for free at Credit Karma. You can update your score every day to monitor any changes.
For future reference, if you’re thinking about closing a credit card, consider these 3 factors:
1. Credit Limit
If your credit score drops, it’s likely because you reduced your total amount of credit available, which increases your credit utilization rate (how much credit you use of your total credit limit on all your cards). When closing a credit card, be aware how much it will reduce your total credit limit and make sure that your credit utilization rate remains below 30%.
2. Credit History
Another big reason your credit score would drop is if you cut your credit history short. Especially since you are young, you need to keep established credit lines open. Since yours was only two months old, closing it shouldn't be too impactful (unless it is your oldest or only credit card).
3. Credit Balance
Always make sure you pay off any outstanding balance on the card before you close, or else the debt will be sent to collections and your credit will take damage from that negative mark.
If you don’t have much contributing to your credit score, get a student credit card, secured card, or a basic credit card to start building healthy credit. While a retail card is easier to get these days than other credit cards, the high interest rate just isn’t worth it.
I have a GAP Visa card. I got it about four years ago, mostly because I was attracted to their rewards points and was buying most of my jeans there. I'm good with paying on time and usually pay half or the full amount of what I spent so I haven't experienced high interest rates.
Now, I want to cancel it, but I've been reading that it’s good to keep old accounts open. How long should I wait to close it? – Guest
First, read the above information on closing a credit card. If a reduced total credit limit won't heavily impact your credit score, great. If closing the card won't drastically shorten your credit history and you have other, older credit cards, even better. Finally, if you paid off the card and have no outstanding debt, then looks like you are ready to close that card.
Second, if you have your heart set on closing that card and you've assessed that your credit score will stay intact, close it now. There is no benefit in waiting to close the card, unless you need time to pay off the card's balance or acquire a new credit card.
How many credit cards can I cancel a year? - Pollynanna
It isn't a question of how many credit cards, but what can you close without risking your credit health.
Two reasons to close a credit score are because there is no balance on it—because you never use it—or if there is an annual fee on the card; but also hedge that against the three factors to consider (read above) of how it can damage your credit score. It's a game of pros and cons, and you're the only one who knows your credit well enough to determine which credit cards to close.
Let's say you have 20 credit cards (hopefully you don't!), seven of which you don't use, have relatively short credit histories, and won't heavily hurt your credit utilization rate. Well then, feel free to close!
Let's say you have three credit cards, and you want to close two of them. Both credit cards have a longer credit history and will make your credit utilization rate skyrocket. Closing these cards will definitely hurt your credit score. In this case, your best bet may be to keep them open and charge a small purchase to them each month and pay them off in full. The cards remain active and contribute beneficially to your credit score, without accruing debt.
If you're curious, check out Credit Karma's free Credit Simulator, which allows you to simulate financial actions—such as closing your credit card—to see what your credit score could look like.
Still have credit questions? Ask Credit Karma in the comments!