What To Know Before You Cancel a Credit Card

Kaitlyn O. says, “I'm a big fan of the Money Girl podcast and have been listening for years! A while ago, I racked up substantial credit card debt. So, I opened a balance transfer credit card and worked hard to pay it all off within the 0% APR period, which worked out great.

However, now I'm stuck with a super basic credit card that doesn’t offer any rewards. While I don't want to waste time with this card, I'm also really nervous about closing it and messing up my credit score. I'm thinking about closing it and requesting a credit limit increase on another card I have that pays rewards. What do you think about that strategy?”

Thanks so much for your question, Kaitlyn! As you mentioned, managing credit cards properly is an essential part of building excellent credit. Many people mistakenly believe that closing credit cards automatically improves their credit. But the opposite is true because canceling credit accounts can instantly damage your credit.

But that doesn’t mean it’s never a good idea to close a card. This post will review what you should consider before canceling a credit account, how to minimize hits to your credit, and tips for closing credit cards strategically.

Why having good credit matters

Before we get into the pros and cons of canceling credit cards, let’s take a step back and review why having good credit matters in the first place. Many people don’t understand that credit affects multiple aspects of your financial life. Please don’t listen to anyone who tells you that credit doesn’t matter.

Most people know that having good credit allows you to get the most competitive interest rates and terms on credit accounts, such as credit cards, mortgages, car loans, and personal loans. For example, paying 1% less for a 30-year, fixed-rate mortgage could save you over $100,000 in interest, depending on the total amount borrowed and how long you own the home.

However, even if you never borrow money to finance a home or car, or you choose not to use credit cards, having good credit improves your finances in the following ways:

•    Reducing your auto insurance premiums (in most states) 

•    Reducing your home insurance premiums (in most states) 

•    Offering more rental housing opportunities 

•  ...

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