Most people know that closing a credit card that is no longer used can potentially damage your credit score. Unfortunately, this knowledge often keeps consumers trembling in fear of closing credit card accounts. And as a result, they hang on to cards they should have closed long ago.
While it is true that closing an account may affect your credit scores, there is a time and place when it makes sense to close an account. And if you are in a situation that calls for closing a line of credit, there are steps you can take to minimize the damaging impact of a closure on your credit report.
5 Acceptable Reasons to Close a Credit Card
Here are five instances where closing a credit card may help you protect your identity and cut the financial impact of maintaining open lines of credit.
- Separating from a joint account holder – If you are splitting up or getting divorced from someone with whom you share a joint account, don’t be afraid to close your shared credit card. As long as the account is open, the card issuer will consider you both fully responsible for any bills either person runs up. Avoid the hassle, cut ties and close your credit account.
- You can’t or don’t want to pay fees on the credit card – If your credit card company is charging an annual fee or you get hit with a late fee, an all attempts at asking the issuer to lower or waive the fee have been denied, it may be time to take your business elsewhere.
The card issuer should be able and willing (provided you have had good credit or are usually on time with payments) to negotiate better terms. Don’t be afraid to close your account and move your credit elsewhere.
- The reward incentive no longer exists – When you open a credit card for the reward incentives, such as bonus miles from your preferred airline or discounts at a department store, and you no longer need or have access to the incentives, then the card no longer makes sense. Oftentimes, people open these credit cards when they are flying frequently for business, however, most airline reward cards carry hefty annual fees after the first year, so you may find it necessary to close one of these accounts and switch to a card with a more useful rewards program. And if you have moved away from an area where you can retrieve your incentives, it makes sense to closes the account.
- When you are ready to end your debt burden – Sometimes you get to the point where enough is enough and you finally earn enough to make the smart money moves without leveraging your credit to live. If you are going to pay off each of your debts (and lower your credit utilization with can minimize the damage to your credit score – see below), and live on only what you can afford, then go ahead and close your credit accounts.
Note: Keeping an account or two open for small purchases which you know you can/will pay in full each month, will help you keep a higher credit score should you decide to reopen credit in the future.
- If you have been the victim of identity theft or fraudulent charges – If your credit card has been lost or stolen, most credit card issuer will automatically close the account and issue you a new card under a new number. However, this may not always be the case. For instance, suppose you set up a recurring billing with a product or service, and even once you cancel the service, you keep getting hit with a monthly charge for more. Or suppose you let a friend use the card for an emergency and you find they have continued to use the account for any “emergency”. Rather than risk having to fight to get charges reversed in the future, you may want to close your credit account to prevent further abuse.
Closing a credit account can hurt you down the road if you lose all the positive history associated with that account, but there are times when closing a card is to your advantage. Consumers should never feel as if they are being held hostage by a credit card they no longer want, however, it can also cause your credit score to drop if you don’t take steps to minimize the damage to your credit score.
Close a Credit Card Without Damaging Your Credit Scores
If you have a suitable reason to end your relationship with your credit card company, what’s the best way to minimize potential damage to your credit scores?
A closed account does not disappear from your credit reports. Although there is not activity or payment history to weigh, the amount of available credit, your length of credit history and the proportion of credit your are using will affect your credit score.
When a credit card is closed, you lose the benefit of the available credit associated with that account. Your balance-to-available-credit (aka “utilization”) ratio looks at how much of your available credit you are using on all of your credit cards as well as your cards individually. If you are using a significant portion of your available credit, you lose points when your credit scores are calculated. For example, if you currently have a balance of $2000 between 3 credit cards with a limit of $4,000 each – you are utilizing only 16% of your available credit. Close one credit card and you are suddenly using 25% of your available credit.
If you do need to close a credit card, consider:
- Keeping as many of your accounts open as possible. This will keep your credit score and debt balances healthy as active and responsible credit use are viewed positively by creditors.
- Keeping your oldest accounts open since credit scoring models take into account the age of your accounts, including the age of your oldest account, your newest account and the average age of all accounts.
- Keeping your overall credit utilization as low as possible – 10% utilization is ideal, but you can still have a good credit score if you use up to 25% or so of your available credit.
After you decide you close a credit card, don’t forget to check your credit reports for updates and errors. Wait 30 to 60 days for the issuer to report the closed account and the credit reporting agencies to update your records. While the accounts and their payment histories will stay on your report for 7 or more years, they should be marked as “closed.”
Improve Your Credit Management & Get Some Expert Advice If you are considering closing a credit card, speak with your trusted financial advisor to negative the steps necessary for your individual financial situation.