When you get to the point where you have eliminated credit card debt or you are very intense about reducing credit card debt and have consolidated your debt, you will reach an important stage. The stage you will reach is the one where you start to debate: Should I cancel my credit card?
You may be practicing great restraint by not using your credit card and I congratulate you for this. You also deserve credit (pardon the pun of course) for taking initiative and showing that you are serious about your credit card debt reduction. Now let’s take a look at what can happen if you decide to cancel your credit card (s).
If you don’t cancel your credit card you have to worry about:
Credit card fraud
Credit card debt reduction is serious, credit card fraud is even more serious. An idle credit card can potentially be exposed to credit card fraud. Even if you know you are not using your credit card it is important you check your balance every month. If you notice any changes to your account it’s imperative that you follow up with your credit card company to resolve things immediately.
Annual credit card fees
If you have a points credit card that charges you an annual fee (or if you still haven’t negotiated to eliminate your fee) then this will be an unnecessary overhead cost for you. I know the $50 or whatever your credit card charges you may seem insignificant but it is money out of your pocket going to the already rich credit card companies.
If you DO cancel your credit card you will have to worry about one very important thing:
Canceling a card results in a negative bump on your credit score
After a year or so the negative affect on your credit score from canceling the credit card should hopefully go away. Unfortunately, until that happens, your lower credit score can have some negative short-term negative implications. It can cause your insurance rates to go up. It can reduce your chances for getting work. Most importantly, it will hurt you when you apply for ANY sort of loan (especially car financing or home mortgage).
How can I avoid this?
If you don’t want to cancel your credit card then automate a payment to it. I keep one of my credit cards in tact by having it setup to pay for one of my small monthly online fees. The credit card remains active, my total available credit remains high, and my credit utilization rate is where I want it to be.
Dealing with a lower credit score
On the other hand- if you absolutely want to cancel your credit card, you must do this during a time where you do not intend on making any major purchases or your credit is irrelevant to you. You may feel thrilled once you have canceled your credit card but wait until you see what happens when you try to finance a car a few months later. If you are willing to accept this temporary setback to your credit score then please understand that you have to live with your decision.
In closing, do not cancel your credit card if you know you will be looking for any sort of loan in the near future (car loan, mortgage, student loan, etc.). If you are a cash-only person, you don’t see any loans in the foreseeable future, and you hate your credit card, then by all means cancel it.