There are many reasons to opt out of a credit card account, including, but not limited to, heightened interest rates, excessive late penalties, unfair policies, hidden fees and overall dissatisfaction with the issuer’s support and service. With interest rates being as high as 29% on some accounts, and the universal default clause allowing for excessive interest rate penalties, it’s relatively easy to become infuriated with a credit card company and cancel an account on the spur of the moment. Opting out of the credit card account in the wrong way, however, could result in even more financial troubles, such as higher interest rates on future credit cards. To keep the credit score intact, consider the following before opting out of any credit card account.
Understanding the Utilization Rate
The utilization rate, also known as the credit to debt ratio, is the percentage of credit available in comparison to the percentage of currently outstanding debt. Ideally, it’s best to have a large overall credit line across several credit accounts and to only utilize 30% or less of it at all times. From the perspective of a prospective lender or credit card company, individuals who utilize less than 30% of their credit are considered to be financially stable and are therefore more likely to repay loans and balances in a timely manner. When the utilization rate rises above 30%, the credit score will begin to drop and it will be more difficult to obtain credit cards with low interest rates and desirable terms.
Calculating Risk Before Opting Out
The main concern associated with suddenly opting out of a credit card account, is that the utilization rate will rise above an unacceptable level, causing the credit score to be damaged. Thus, before opting out of any account it is important to establish the current utilization rate and estimate what it will be if the account is closed. For example, an individual with a total credit line of $10,000 and a total outstanding debt of $3000 (utilization rate of 30%), would not be wise to close a credit card account with a $3000 limit, as this would cause their utilization rate to rise to 42%, subsequently causing the credit score to be lowered.
Alternatives to Opting Out
Instead of opting out, consider consolidating the outstanding balance to a balance transfer credit card with a lengthy 0% APR introductory period. By managing account balances on a long-term basis, and maintaining a low utilization rate, the exact opposite of opting out improperly can be accomplished – the credit score can be raised consistently. If opting out of a particular account would endanger the utilization rate and credit score, it may be better to pay the card off in full and then avoid using it for any transactions for as long as the interest rate remains unreasonable.
Similar Posts:
- Understanding Credit Utilization and FICO Credit Scores
- Three Mistakes to Avoid When Rebuilding Credit
- How to Determine a Suitable Credit Line
- How to Know When a Credit Card Is Worth Keeping
- What to Consider Before Switching Credit Cards
Tags: Credit, Credit Card
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