To Close Your Credit Card, or Not to Close Your Credit Card?

Have you considered closing a credit card account? Are you aware of the positive and negative impact of doing so?

If you have a zero-balance card – especially if it required commitment and sacrifice to pay it off – you may be tempted to cancel it altogether in a final salute of victory. However, did you know this action can actually damage your credit score? Closing a credit account can reduce your credit utilization (ratio of your credit card debt to available credit) and length of credit history – two factors that help credit bureaus determine your score. In the end, a lower credit score may prevent you from qualifying for additional loans or lines of credit.

On the other hand, life circumstances or a deep-rooted desire to “charge it,” may outweigh the blip on your credit score.

Review these guidelines to determine whether closing a credit card is the right move for you:

When to Close a Credit Card

• Spending problem: If you have a hard time controlling your spending – and you know “cutting your card” isn’t enough to curb the problem – then close your account to avoid falling deeper into debt.
• High fees: If you are required to pay steep fees to keep the card, such as annual fees, transaction fees or over-limit fees, then pay your balance down and cancel the card. You can also transfer your remaining balance to a credit card with a lower interest rate and fewer fees (and commit to no further spending on the account as you pay it off).
• Potential fraud: If your credit card account is compromised and you don’t feel comfortable with a “freeze” alone, close the account to protect yourself from fraud.
• Joint account: If a joint account needs to be separated, as in a divorce, canceling your card may be the best option.
• Balance transfer: If you have transferred a balance to a lower-interest card, consider canceling the high-interest credit card, especially if you’ve had the account for less than three years. Conversely, if you have a long history with the card, or if there are hefty cancelation penalties included in the fine print, it may be smarter to simply put it away or cut it up if you are tempted to use it.

When Not to Close a Credit Card

• Lack of use: Rethink canceling your card just because you aren’t using it. If you want to remove the temptation to spend, consider cutting the card and keeping the account open. You can also store the card in a safe place for emergencies. Canceling the account can drop your credit score, more so if you’ve had the account open for more than three years.
• Making payments: Finance charges accrue when there’s a balance on the credit card, whether or not you close the account or keep it open. Your debt-to-credit ratio will improve as your balance is paid down, but only if the account is open. Stop using the card or even cut it up, but keep the account open as long as you’re paying it off.
• Loan approval: Do not cancel a card if you’re planning to purchase a house or a car in the next year, as this can impact your credit score and potentially prevent you from qualifying for a loan, or qualifying for a loan at your desired interest rate.

No matter what you decide to do with that card, be sure to check your credit report annually so you can track your financial progress and identify any red flags or fraud. You can review your report with all three credit bureaus for free at www.annualcreditreport.com.