What to Know Before Closing Your Credit Card
If you're thinking about closing one or more credit cards, there are some things to consider before making the call. The desire to close a card once it's paid off is understandable, but doing so actually has the potential to harm your credit score, rather than help it.
Closing a credit account can reduce your credit utilization (the ratio of your credit card debt to available credit) and length of credit history – two factors that help credit bureaus determine your 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 – close your account to avoid falling deeper into debt.
- High fees: If the card has annual fees, transaction fees or over-limit fees, pay your balance down and cancel the card. You can also consider transferring 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: If you haven't used a card in some time, closing it probably feels like a logical step. But canceling the account can drop your credit score, especially if it's been open for more than three years. 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.
- Making payments: Finance charges accrue when there's a balance on the credit card, whether the account is open or closed. 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 receiving the optimal interest rate.
Whether you close your card or keep it open, be sure to check your credit report annually. Doing so allows you to 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.