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.
So Edwin, you are suggesting giving your card away to someone else because you can’t seem to know how to handle it properly yourself?
On top of that, risk comes with that, what if that parent or partner maxes out your card and leaves it to you to pay it off, was giving your card such a great idea now?
Thomas, Studenomist made the suggestions and I think it can be a good idea. But of course that depends on the amount of responsibility that person themselves has. I for one could easily trust my parents but I wouldn’t just recommend everyone go around giving their credit cards out.
I would just cut the credit card up personally but if someone doesn’t want to get rid of it, giving it to a trusted (keyword trusted) relative is a good way to keep it out of your hands yet not destroy it.
Let’s face it, majority of our parents are in debt and can’t handle money properly.
Whoever you give the card to, you will still be held responsible when things go wrong.
And cutting up the card doesn’t solve anything, what happens to your credit history when you go apply for a loan a year from now? They will look at your history and tell you sorry you have no credit history for the past year or for however long it is.
It’s not relevant whether your parents can or can’t handle debt. What matters is if they will steal from you or not. You don’t just hand them your card and tell them it’s time to go shopping.
Dropping credit cards from your recent credit history is not near as dramatic as you make it sound. You still pay bills and likely have a car payment and possibly a house payment along with smaller bills like the cell phone.
Thomas, you seem almost irrationally aggressive towards any attempt at someone getting rid of their credit cards and I don’t really understand why.
Well it sure is relevant because when the banks comes and says pay up, they won’t ask what happened, they will just want the money.
I mean just look around, how many people do you know that are debt free, excluding mortgages?
I am fairly aggressive because the track record matters a lot. I don’t think age makes a difference because we will need credit throughout our life.
If a banks looks at your credit report and notices gaps, they will question it. Same idea with your job history.
My main argument is that we all need credit, but also credit cards are tools for us to use or abuse. We can use it to our advantage or end up deep in debt and struggling.
Thomas, you are implying that it is impossible to trust your relatives and they are guaranteed to steal your money, which is ridiculous
Everything you’ve said so far is not relevant whatsoever because if you can trust your parents to keep your credit card but not rake up charges then there is no problem giving it to them for safe keeping.
I agree it’s not a simple process where you either just get rid of your credit card or max it out but that’s not relevant.
I’m going to leave the conversation at this point because Studenomist gave a reasonable way to get rid of your credit card and I agreed with it. You then went on to some strange paranoia that all your parents would do is charge up the card, which I find ludicrous. You bring up important points which I agree with but using them to argue that destroying or giving away your credit card is absolutely a bad idea is silly.