RALEIGH, N.C. (WNCN) — We all know that our credit rating is used to determine things like whether will creditors will loan you money but, did you know that trying to get rid of some of your credit cards could adversely affect your credit rating?
It’s the credit card conundrum. Before you just cancel the card, you need to know there’s a right way and a wrong way to do this—and a way to do it with the least impact on your credit score.
Apex resident Rick Craine says when he wants to cancel a credit card he, “Just calls them up and closes it out.”
Many consumers are like Rick Craine. But, by doing it that way they could be hurting themselves financially.
“There is a very wrong way to close out a credit card,” says registered financial consultant “coach” Pete D’Arruda.
D’Arruda has been referred to as the credit king.
“If you have a credit card with a high utilization limit, which means money you can borrow, you don’t want to cancel that,” says D’Arruda. “It’ll hurt your overall utilization rate.”
In other words, lenders won’t want to give you money.
Instead of cancelling a card that’s growing too big, stop spending on it and concentrate on paying it down—but keep it active.
“As long as you are making monthly payments, it really helps your credit score,” explains D’Arruda.
Generally speaking, to avoid credit rating turmoil, there are several things you should avoid doing with a credit card.
• Don’t close a credit card that still has a balance (it drops your credit limit to zero and makes it look like you’ve maxed out your card)
• Don’t close your oldest credit card (it shortens your credit history)
• Don’t close your only credit card (removing it takes points away from your credit score)
Let’s say you get a letter which says your inactive credit card with a really high limit hasn’t been used in years and it’s about to be shut down unless you buy something with it again. Should you let it be closed out?
“You’re killing yourself by cancelling it,” says D’Arruda. “You’re ruining all that good credit history. It just goes away and falls off your report.”
Instead, experts like D’Arruda say you should buy something inexpensive on that on that card every 4-5 months just to keep it active that also keeps that high spending limit from being taken off your credit rating.
If you decide to cancel a credit card, pay down your balance in full first. Creditcards.com says you can’t completely close a card until the balance is paid.
When you close out a card, speak to a human. Make it clear you want it noted the card is being closed at the customer’s request. You should also send a letter to the credit card company stating that want your credit report to reflect that the account was closed at the consumer’s request.
To help you navigate through the many steps you need to take to close a credit card, check this link which offers advice, checklists and other detailed information you need to know.