How to Opt Out and Protect Your Credit Score |
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by: Janna Weiss
Like many Americans, you may have noticed that your credit card 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. How will opting out affect your credit score?
This concern stems from the fact that the amount of available credit you have is a big factor in your credit-worthiness. If you have a lot of available credit, but only utilize 25% or less, lenders 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 lenders 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 credit card accounts, or even get a job or rent an apartment.
But surely losing some of your available credit simply because you choose to opt out of exorbitant interest rates won’t hurt damage your credit score, right? That depends.
For the sake of example, let’s say you have $20,000 in total available credit. If you close a credit line worth $10,000, you will cut your available credit 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-established account, it will help your credit score by proving that you can manage your debt over time. If the credit card 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 rate won’t apply to you. A high interest rate alone will not hurt your credit score.
You could also shop around for better card deals, replacing the line of credit you’re closing with another one (or more) at a better interest rate. Card rates 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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