Whether you should close unused credit cards has been a debatable topic.You would like to come down on the one side of the fence or the other. However, it is not always possible to choose between option A or option B. Sometimes it becomes necessary to find middle ground.
Whether you apply for a short-term loan or a mortgage, your credit history plays a paramount role to convince lender that you can afford to pay off the debt. At the time of applying for a mortgage, your credit history should be stellar so that you can get the deal at better interest rates. However, you will need to have a good amount of deposit.
The larger the deposit, the lower the interest rate. Some people are out there who fail to arrange enough deposit for a mortgage, but you can get the deal if you have a good credit rating.
If you want to get a mortgage with no deposit in the UK, you should consult a broker as they will run a soft credit check before arranging a lender for you like Shinemortgages.co.uk. A soft credit check will not pull your credit rating. The chances of getting approval of such mortgages are a bit hard, but a broker can convince the lender easily if you have a good credit score.
When it comes to building credit, you often think of paying bills on time, settling all dues etc, but despite making such efforts you get your application turned down. What does account for the refusal? Of course, poor credit rating.
In the journey of building your credit, you often overlook your credit cards. Both closed accounts and unused credit cards can wreak havoc on your credit rating. It means whether you should close the account or let it be open depends on your circumstances.
The affect of unused credit cars on a credit score
If you have never borrowed money or have no credit card, you will unlikely to have approval because your lender will doubt your affordability. It will bring a question to mind that how you will afford such a big loan if you have never borrowed money before.
Having a credit card can contribute to your credibility. A lender would always like to know that you are sensible with your debt repayments that you can show by using a credit card.
The rule of thumb says that you should use your credit card and pay the bill on time before the grace period expires. This shows your sensible behaviour toward debt and builds trust among lenders that you will not face difficulty managing your mortgage.
However, you need to be careful with the use of your credit card. Unreasonable use can lead to a higher credit utilization ratio. It is the percentage of using the credit limit. It should be as low as possible. Try to keep it between 25% and 30%. If your credit utilization is very high, it will indicate that you excessively rely on debts and this sort of behaviour can be problematic for mortgage repayments.
Before you know whether the cancellation of a credit card will affect your score or not, you need to understand that every lender has different set of rules to calculate it. Generally, this method includes taking into account information on your application form, credit report and data they hold if you have ever applied for a loan earlier. This is why cancellation can affect your score.
Closing an unused credit card can undoubtedly prevent you from fraud, but you do not need to close it if it has a well-managed payment history. Keep it open because it will prove that you are a sensible and reliable borrower. Your lender will be more convinced to sign off on your application despite a little or no deposit.
Closing an account sometimes can negatively affect your credit rating. For instance, if the overall credit limit was £3,000 and you used £1,500 of it, the credit utilization ratio was 50%. Suppose you closed some of your credit cards that brought down the credit limit to £2,000. The credit utilization ratio would increase from 50% to 75%, which is very high.
While deciding whether to approve your mortgage application, lenders take into account both the available credit limit and credit used.
So, before closing any account, you should figure out if it worsens your credit score or make it better. Whether you have a single or multiple credit cards, make sure that you do not max out it and keep the credit utilization ratio as minimum as possible.
Some people in order to gain some benefits from the cancellation of a credit card apply for a new card with the same provider to take advantage of new customer offers. However, you will have to meet the criteria to get new customer offers. If it is not possible, you can apply for a new credit card with a different provider altogether.
What if your credit card has a balance?
Cancelling a credit card is not possible if you still owe the credit card provider. You can let them know about it, but they will keep it open and it will show on your credit report until you pay off.
You can move your credit balance to a balance transfer credit card, but this option is generally suitable if you can get it done on an unused credit card. If you apply for a new card, you will have to get a hard credit check. This will show up on your credit report and pull your score.
Now that you must have got to know when you should cancel your credit card. Make sure that you have paid off all dues before getting into the process of applying for a debt. Whether you have arranged a deposit or you are applying for a mortgage without deposit, you need to ensure that your credit score is good. Start building your credit from now.
Description: Whether you should close your accounts or not depends on your financial circumstances. This blog discusses when it is a good idea and bad idea to do so.