Should You Close Your Old Credit Card?
Many Canadians Are Holding on to Their Old Cards
Hundreds of thousands of Canadians continue to hold on to credit cards that are several years old and not being actively used. Some of the reasons people hesitate to close their credit cards include sentimental reasons, forgetting about the credit card altogether, or simply not wanting to deal with the hassle of closing the card. The result is that many people end up holding on to their cards even if they come with high fees and don’t offer any tangible benefits.
Most consumers are aware that reducing credit card debt is a key step towards achieving financial wellbeing. And many people have been able to pay down their debt during the pandemic as a result of lowered monthly expenses. As a result, they may be thinking this is a good time to close a credit card they may not be actively using. This could be a good option but there a few things you need to think through before taking that step.
Consider a Different Credit Card
Continuing to carry credit cards could have some advantages. One key advantage is that it can keep your credit utilization ratio low. This is a measure used by credit bureaus to see how much of your available credit you are using and the lower the ratio the better it is for your credit score. For that reason, it may sometimes be beneficial to have an extra credit card. However, this has to be weighed up against any fees that it may come with.
Contact your credit card company to see if there is a more suitable card available with lower or no fees so that you can continue to benefit from having a credit card on your credit profile while avoiding unnecessary expenses.
Consider the Timing
This could be a critical point to consider if you are in the process of buying a home or applying for a loan. If that’s you, it may be a good idea to postpone making any credit card changes until after the deal closes. The reason for this is that most lenders do not like to see too many changes in the applicant’s credit score when they are evaluating your application.
A by-product of closing an old credit card is that your available credit could drop, which could lead to an increase in your credit utilization rate, which in turn can have a negative impact on your credit score and jeopardize the chances of having your application approved.
While it’s always a good idea to proactively manage your credit card usage and avoid paying unnecessary fees, it is also important to take a holistic view of your financial situation and make sure the timing is right for the actions you are taking and that they don’t have an adverse effect on another area of your finances.
Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.