Like many Americans, you may have noticed that your charge card account annual Percentage rate is poised to increase – as high as 29.99% in some cases, even if you’ve got a sterling payment history! You can choose to opt out of these changes, but to do so, you must close your credit card account account.
How will opting out affect your credit score?
This concern stems from the fact that the amount of available in your credit line you have is a big factor in your credit-worthiness. If you have a lot of available in your credit line, but only utilize 25% or less, credit card companies are more likely to see you as a financially responsible individual who is likely to avoid sinking too deeply into debt. They will lend you money because they will perceive you as low-risk.
On the flip-side, if you have a lower credit-to-debt ratio, your credit score will fall and credit card companies might think of you as too great a risk to lend money or extend credit to. This can interfere with your ability to buy a house, get a car loan, open new charge card account accounts, or even get a job or rent an apartment.
But surely losing some of your available in your credit line simply because you choose to opt out of exorbitant interest interest rates won’t hurt ruin your credit score, right? That depends.
For the sake of example, let’s say you have $20,000 in total available in your credit line. If you close a credit line worth $10,000, you will cut your available in your credit line in half, and your debt-to-credit ratio will increase as a result.
Also, some credit models take the age of the account into consideration; if you have a well maintaned account, it will help your credit score by proving that you can manage your debt over time. If the charge card account you want to cancel is an old one with a generous credit limit, you might want to think twice before you give it up.
A better choice might be to pay off the balance as quickly as possible, and leave the account open – just avoid making charges that you can’t pay off at the end of the month. If you don’t carry a balance, the high interest annual Percentage rate won’t apply to you. A high interest interest rate alone will not hurt your credit score.
You could also search around for better card deals, replacing the line of credit you’re closing with another one (or more) at a better interest annual Percentage rate. Card aprs are generally higher now than they were in 2008, even for consumers with good credit. You’ll have to consider what constitutes a “good deal” these days. 12% – 18% is not uncommon. Good luck!
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