Going over your finances you’ve noticed you have a credit card or two with zero balances. Perhaps you’ve had a credit card settlement, gotten your spending under control, and see no good reason to keep the cards, especially if the credit limit is low. Well, not so fast, because like many things in life, there are upsides and drawbacks involved.
Here are the pros and cons of closing a credit card account.
Pros of Closing Your Account
Minimal Credit Score Damage
Closing a card with a relatively short history likely won’t hurt your credit as much as it would ditching a card you’ve had a while. Lenders like to see a history of good credit management, the longer the better.
One Less Card to Keep Track Of
It can become unwieldy to keep up with several cards and their various payments and due dates. So, if you’re set on closing a card, pick the most recent one you’ve opened or the one with the lowest limit.
Helps Keep Your Spending in Check
Having one less card means you’re less tempted to spend and get yourself in debt trouble. Perhaps you’ve had problems in the past with spending. In that case, a card with a zero balance could prove irresistible. If you’re thinking of closing a card, you might want to consider the account with the highest interest rate.
Ultimately, your overall financial health could be more beneficial to your credit profile than the advantages of keeping a card open. Cancel it If you’re concerned that leaving the credit card open could eventually return you to a troublesome debt situation.
You Can Avoid an Annual Fee
If you have a credit card with a hefty annual fee – some travel cards are known for this — and it’s rarely used, this might be the plastic to close.
Cons of Closing a Credit Card Account
You Could Hurt Your Credit Utilization Ratio
Closing your account could have an unfavorable affect on your credit utilization ratio, which is the amount of debt you carry overall compared to the amount of credit available to you.
For example, if you have a single card with a $1,000 credit limit and $300 balance, your utilization rate is 30%. Now, if you also have a card with a $1,000 limit that you’ve just paid off, your utilization rate is 15%. Your credit score could drop if you close that account, because credit utilization comprises about 30% of your credit scoring.
Hurts the Average Age of Accounts
Closing your paid-off card could also decrease the average age of your accounts, which could damage your credit score. On the other hand, maintaining an older card could demonstrate to lenders that you are able to manage credit over several years.
You Could Lose Rewards and Other Benefits
Before shutting a card down, consider whether you’d be missing out on perks such as cash back rewards. You may want to at least rethink the timing if you’re going to make a big purchase soon. Also, perhaps the card has an unusually low interest rate that likely won’t be there if you apply for the same card down the road. You can better determine your best move if you apply these pros and cons of closing a credit card account to your financial situation. If you’re in over your head on your other card accounts, you might want to consider hiring a company to settle your debts.