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What Canceling a Credit Card Does to Your Credit Score

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Very Upset Woman Holding Her Many Credit Cards.

To answer the question “how does canceling my credit card affect my credit score?” you need to understand how your credit score is calculated. Your credit score is based on the following five factors: amounts owed (utilization), payment history, length of credit history, credit mix, and new credit.

When you cancel a credit card, you may affect several of the factors that make up your credit score. While there is no specific answer as to how many points your credit score will actually be affected when you cancel a card, it’s well known that it will, in fact, be affected negatively.

[Decoding How FICO Determines Your Credit Score.]

Credit Utilization

Credit utilization is the factor that is most likely to be affected if you cancel a credit card. Your credit utilization is part of the “amounts owed” category that accounts for 30% of your credit score. Credit utilization compares your credit card balances to your credit limits. When you close a credit card, you are closing an entire line of credit, which could make your utilization ratio worse because you’re decreasing the available credit limit you have. Unless you decrease your spending after you close a card, or open a new card, you are likely going to negatively affect your utilization ratio.

How your specific credit will actually be affected depends on a number of things, including whether you have a balance on the account you’re closing and whether you have balances on other credit cards you have open. If you have no debt or little debt on the card you’re closing, but more debt on the cards that you’re keeping open, then you will probably increase your credit utilization (like in the example above). This will have a negative impact on your score. However, if you spend 20 percent or less of your remaining credit limit and you always pay off your bills on time and in full, your score won’t be harmed as much from a utilization perspective.

For example, if you have three credit cards with $2,000 limits on each, and a $200 balance on the first card, a $500 balance on the second card, and a $700 balance on the third card, your total credit limit is $6,000 and the total credit you’re using is $1,400. If you pay off and close the first card, your total credit limit becomes $4,000 and the total credit you’re using becomes $1,200. When you had all three cards your utilization ratio was 23% ($1,400/$6,000). After you closed the first card your utilization ratio became 30% ($1,200/$4,000). In this example, by closing one line of credit, you increased your utilization ratio, which has a negative impact on your credit.

The bottom line is that you want to still keep your credit utilization at 20 percent or less when you close your card. Otherwise, it will have a negative impact on your credit score.

[Best Free Credit Score Sites for Each Bureau.]

Payment History

Canceling a credit card won’t immediately affect the payment history category that factors into your credit score, which accounts for 35% of your credit score. This is because the payment history of any account you close will remain on your credit report and be factored into your credit score for seven years for negative history and ten years for positive payment history. So, just because you close an account does not mean it stops impacting your credit – in fact, it will continue to be a part of your credit for a long time.

[5 Credit Card Myths Hurting Your Wallet and Credit Score.]

Length of Credit History

A third category that will be affected by canceling your credit card is the length of credit history, which accounts for 15% of your credit score. After you cancel your card, whether it’s seven or ten years later, eventually, that card history will drop off your credit reports and no longer be included in calculating your score. This could negatively affect your credit if it was your oldest account and the other accounts were much newer. Because of this, you should consider how long you’ve had credit cards before canceling them. It’s generally better to close a newer account than an older account because you can maintain a longer credit history this way.

Credit Mix & New Credit

If you cancel a credit card and it was your only credit card, then you are removing an entire category of a source of credit, which will affect your “credit mix” (10% of your score). This indicates your ability to handle a variety of credit, commonly: student loans, mortgages, personal loans, auto loans and credit cards. A credit card is the only way to be building that credit score without paying a penny in interest. If you pay your statement off on time and in full each month, then you’re establishing a score without giving the bank money. Cancelling your own credit card removes one of the ways you can prove to a lender you’re a reliable borrower, which can lower your score.

If you are canceling a credit card, this won’t affect the “new credit” category, which makes up 10% of your score. This is because the very nature of canceling a card means that you are getting rid of credit, not opening new credit.

[6 Simple Steps to Improve Your Credit Score.]

3 Tips to Consider Before Canceling a Credit Card

Knowing that your credit score may take a hit if you cancel one of your credit cards, you should consider the following factors before making the decision to close a card.

  1. Consider canceling cards that cost you money. If you pay high fees on any of your cards, these are the cards you should consider canceling first. It doesn’t make sense to keep a card open that is costing you a lot of money.
  2. Consider upcoming financing you’ll be doing. If you are applying for financing, such as a mortgage, you want as high of a credit score as possible. Therefore, you should avoid doing anything that will decrease your credit score before you get financing.
  3. Consider negotiating with the credit card company. If you want to cancel a credit card because of a high fee or a high interest rate, call the company and negotiate better terms. Often, credit card companies will work with you because they want to keep you as a customer. This may be a better option for you if you can get more favorable terms.

A Final Word

Canceling a credit card may negatively affect your credit score because it will affect your credit utilization ratio, payment history, length of credit, and credit mix. That said, there are reasons to cancel a credit card, especially if you are overspending or paying high fees and interest. The exact number of points that your score could go down varies – there’s no way to know fore sure. This is why you should look at your entire financial situation and make the decision that is best for you before you cancel a credit card.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Natalie Bacon is a writer at MagnifyMoney. You can email Natalie at [email protected]

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In 2008, I moved to the U.S. with my wife, Margarita, after living in Moscow. Although Margarita had an impressive career in Russia, she was not a U.S. citizen and had no credit history or credit score. If you don’t have a credit score in the U.S. this basically means you don’t exist, at least in the eyes of lenders. In fact, one in 10 Americans is considered “credit invisible,” meaning they don’t have enough credit history to produce a credit score.

This was a problem we knew we had to fix fast, especially if Margarita wanted be able to take out credit cards or an auto loan, or even apply for an apartment lease in the future.

By following a few basic steps, within 12 months, she had a very good credit score. Within 18 months, she had an excellent credit score and qualified for a rewards credit card with a $25,000 credit limit.

How to open a secured credit card

Opening a secured credit card is relatively easy. You have to provide the bank with a deposit, which is typically $200 or more. The bank will keep the deposit as collateral and will provide you with a credit limit equal to your deposit — some cards may even give you a higher limit without requiring a larger deposit. In Margarita’s example, she gave the bank a $500 deposit and received a $500 credit limit.

Once open, the credit card works like any other. Your credit limit, balance and payment information are reported to the three major credit bureaus. The only difference: If you fail to pay your credit card on time, the bank can take your deposit and apply it toward the debt.

So the bank has a guarantee that they won’t lose money. And you have the opportunity to prove that you will use your credit wisely.

How to use a secured credit card

Given that I was a bank credit risk manager at the time, I knew a bit about credit scoring. So I made sure Margarita followed this strategy:

  • She used the card every month, but for a very small amount. Her typical monthly bill would be around $10.
  • She made sure that she paid the balance in full and on time every month by signing up for automatic payments.
  • She subscribed to a credit scoring service to watch her score improve over time.

It took about six months for Margarita’s score to cross the 600 threshold. About 18 months after starting, she had a score well above 700. At that point, she applied for a rewards credit card. It had a great sign-on bonus and a  $25,000 credit limit.

So it only took a year and a half for someone to go from being a credit nobody to one of the most sought-after customers in the country. What was the trick? It is actually very simple.

3 key rules to follow

Use your card every month

In order to have a FICO® Score, you must have activity on your credit report over the past six months. If there is no activity on your report during this time, you cannot get a score.

Activity does not mean you need to go into debt. You can make a single purchase every month (even for just $1) and that is considered activity.

Keep your utilization low

One of the most important components of your credit score is utilization, making up 30% of your FICO® Score. Your utilization is calculated by dividing your statement balance by your total available credit. People with the best credit scores have utilization levels of 10% or less, but at most, you want to stay below 30%. That means if you have a credit limit of $1,000, you should not spend more than $300 a month.

The best strategy with a secured credit card is to select one small, recurring transaction and automate it. For example, use your secured credit card for your monthly Netflix or Spotify® bill.

Pay your bill in full and on time every month

The most important part of your credit score is a history of on-time payments. This factor alone comprises 35% of your FICO® Score. Even a single missed payment can have a very negative impact on your score. The best way to ensure that you don’t miss a payment is to set up autopay.

Additionally, make sure you pay your balance in full, so you will not have to pay interest. There is nothing more ridiculous than paying interest on a secured credit card. Remember: Your credit limit is equal to your deposit. You are literally borrowing your own money. But if you pay interest (at a high rate), you will be paying a bank to borrow from yourself.

This is just a long way of saying that Margarita’s approach worked. If you want to use a secured credit card to build your credit score, just use it every month for a $10 charge. And pay that balance in full and on time. As a result, your score should improve.

How to select the best secured credit card

When selecting a secured credit card, we recommend you focus on the annual fee — you shouldn’t have to pay one. You can find our roundup of the best secured cards here.

Our top choice is the Discover it® Secured.

Discover it® Secured

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on Discover Bank’s secure website

Rates & Fees

Read Full Review

Discover it® Secured

Regular APR
25.24% Variable
Annual fee
$0
Credit required
bad-credit
Poor/New

How the Discover it® Secured works

There is a typical $200 security deposit, but you can receive it back if: 1. You pay your balance in full and close your credit card account, 2. You qualify to be refunded your deposit during one of Discover’s monthly automatic account reviews (starting at eight months from account opening) and 3. You upgrade to an unsecured card.

Cashback rewards: In this cashback program, you earn 2% cash back at restaurants or gas stations on up to $1,000 in combined purchases each quarter and 1% cash back on all other purchases.

The cashback match. The Discover it® Secured has a new cardmember bonus where Discover automatically matches all the cash back you’ve earned at the end of your first year. The cashback rate is great in general, as few secured cards have rewards, and it’s primarily beneficial for people who typically spend on gas and dining. The cashback match you receive is unique because there is no minimum spending requirement for you to earn the additional cash back. Most cards set a three-month time period and minimum spend for you to earn a new cardmember bonus, but not Discover.

An alternative

Capital One® Secured Mastercard®

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on Capital One's website

Read Full Review

Capital One® Secured Mastercard®

Regular Purchase APR
26.99% (Variable)
Annual fee
$0
Minimum Deposit
$49, $99, or $200
Credit required
bad-credit
Limited/Bad

Upgrading from a secured card to a traditional, unsecured card

Typically, for secured cards from the major issuers such as Discover, Capital One® and Citi®, the upgrade from a secured card to unsecured card involves:

  1. An automatic review process. This checks your eligibility for an unsecured card. The review process varies by issuer, with some cards starting it eight months from account opening and others waiting until 18 months.
  2. Receive your security deposit back. If you qualify for an upgrade and your balance is paid in full, you will receive your security deposit back.
  3. Receive an unsecured card. In addition to receiving your security deposit back, you will be transitioned to a traditional, unsecured card.

If your card doesn’t have an automatic upgrade process, we recommend the following:

  1. Check your credit score often to track your progress toward building credit.
  2. Search for a new card that fits your credit score. There are plenty of options for fair, good or excellent credit — and the better your score, the more options available.
  3. Check for pre-qualification. Before you apply for a new card, check to see if there’s a pre-qualification feature. This allows you to check your approval odds and shop around for the best offer without hurting your credit score. But keep in mind that pre-qualification isn’t a guarantee of approval.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
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Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

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Build Your Credit Score: 6 Secured Cards With No Annual Fees – May 2019

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Secured cards are a great way to build or improve credit. When you open a secured card, you submit a security deposit that typically becomes your credit limit. This deposit acts as collateral if you default on your account, but you can get it back if you close your account after paying off your balance. As long as you use a secured card responsibly — for example, make on-time payments and use little of your available credit — you may see improvements in your credit score. Unfortunately, in addition to the upfront deposit, this credit-building tool can have extra costs, like an annual fee.

You can avoid that expense with one of these six no annual fee secured cards, which have a variety of uses:

Cards to consider

Rewards

Discover it® Secured

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on Discover Bank’s secure website

Rates & Fees

Discover it® Secured

Annual fee
$0
Minimum Deposit
$200
Regular APR
25.24% Variable

The Discover it® Secured is a standout secured card that provides cardholders the opportunity to earn cash back while building credit. A cashback program is hard to find with secured cards, and the Discover it® Secured offers 2% cash back at restaurants & gas stations on up to $1,000 in combined purchases each quarter. Plus, 1% cash back on all your other purchases. In addition, there is a new cardmember offer where Discover will match ALL the cash back earned at the end of your first year, automatically. This is a great way to get a lot of rewards without needing to do any extra work.In addition to a cashback program, this card provides valuable credit resources such as free access to your FICO® Score and a Credit Resource Center — just note these services are available whether you’re a cardholder or not. Discover also takes the guesswork out of wondering when you’re ready for an unsecured card (aka a regular credit card) by performing automatic monthly account reviews, starting at eight months of card membership.

What to look out for: There is a high 25.24% Variable APR for this card, so you could end up paying a lot more than purchase prices if you carry a balance. Try not to overspend and make it a goal to pay each statement in full so you avoid interest charges.

Low deposit

Capital One® Secured Mastercard®

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on Capital One's website

Capital One® Secured Mastercard®

Annual fee
$0
Minimum Deposit
$49, $99, or $200
Regular Purchase APR
26.99% (Variable)

The Capital One® Secured Mastercard® offers qualifying cardholders a lower security deposit compared to other secured cards. You will get an initial $200 credit line after making a security deposit of $49, $99, or $200, determined based on your creditworthiness. Typical secured cards require you to deposit an amount equal to your credit limit, so this card has added perks for people who qualify for the lower deposits.You can also receive a credit limit increase without making an additional deposit after making your first five monthly payments on time. This is beneficial for people who need a higher credit limit and don’t want to (or can’t) tie up their money in a deposit. Also, you’ll have access to CreditWise® from Capital One® and Platinum Mastercard® benefits that include travel accident insurance and price protection.

What to look out for: The $49 and $99 security deposits are not guaranteed and depend on your creditworthiness — that means you may still have to deposit $200. Also, it’s not a good idea A carry a balance on this card because it has one of the highest APRs at 26.99% (Variable).

Average deposit

Citi® Secured MasterCard®

The information related to Citi® Secured MasterCard® has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.

Citi® Secured MasterCard®

Annual fee
$0
Minimum Deposit
$200
Regular Purchase APR
24.74%* (Variable)

The Citi® Secured Mastercard® requires a $200 security deposit, which is typical of secured cards and a good amount to establish your credit line. You can deposit more money if you want to receive a higher credit line, but if you don’t have a lot of money available to deposit, coming up with $200 is manageable. This card doesn’t have any additional card benefits like rewards or insurances, but you can access Citi’s Credit Knowledge Center for financial management tips.

Low APR

Visa® Secured Card from MidSouth Community FCU

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on MidSouth Community FCU’s secure website

Visa® Secured Card from MidSouth Community FCU

Annual fee
$0
Minimum Deposit
$200
Regular Purchase APR
11.15% Variable

Because MidSouth Community is a federal credit union, you need to be a member to qualify for this card. Membership is limited to people who work, live, worship, or attend school in the following Middle Georgia counties: Bibb, Baldwin, Crawford, Hancock, Houston, Jones, Monroe, Peach, Pulaski, Putnam, Twiggs, Washington, and Wilkinson. If you qualify, you may be able to get a secured card with an APR as low as 11.15% Variable.

What to look out for: This card is very restricted, therefore few people will be able to qualify for this low APR secured card.

Unrestricted low APR

Affinity Secured Visa® Credit Card

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on Affinity Federal Credit Union’s secure website

Affinity Secured Visa® Credit Card

Annual fee
$0
Minimum Deposit
$250
Regular Purchase APR
12.85% Variable

The Affinity Secured Visa® Credit Card requires cardholders to join the Affinity FCU. You may qualify through participating organizations, but if you don’t, anyone can join the New Jersey Coalition for Financial Education by making a $5 donation when you fill out your online application. This card has an 12.85% Variable APR, which is one of the lowest rates available for a no annual fee secured card and is nearly half the amount major issuers charge. This is a good rate if you may carry a balance — but try to pay each statement in full.

What to look out for: There may be a membership fee associated with this card if you don’t qualify through participating organizations. The fee you may have to pay is low at $5, but it may be an issue for people who don’t want to pay anything to open a secured card.

Unrestricted federal credit union

Savings Secured Visa Platinum Card from State Department Federal

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on State Department Federal Credit Union’s secure website

Savings Secured Visa Platinum Card from State Department Federal

Annual fee
$0
Minimum Deposit
$250
Regular Purchase APR
14.24% Variable

The Savings Secured Visa Platinum Card from State Department Federal is open to anyone, regardless of residence. If you aren’t eligible through select methods including employees of the U.S. Department of State or members of select organizations, you can join the American Consumer Council during the application process. There is no fee associated with joining since State Department FCU pays the $5 on your behalf. There is a rewards program with this card where you earn Flexpoints, which can be redeemed for a variety of options like gift cards and travel. The APR can be as low as 14.24% Variable, which is reasonable considering many secured cards from major issuers are above 23%.

What to look out for: If you decide to take out this card and become a member of the SDFCU by joining the American Consumer Council, make sure you do not go to the ACC’s website and submit a $5 donation. That fee is waived by the SDFCU when you fill out your credit application. Simply select “I do not qualify to join through any of these other methods:” and select the ACC from the menu to avoid the $5 fee.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Alexandria White
Alexandria White |

Alexandria White is a writer at MagnifyMoney. You can email Alexandria at [email protected]

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