Thinking about cutting up your credit cards? Closing credit card accounts that you are not using? Before you do either one of these things, you may want to think twice!
Let’s face it, at one time or another, we have all run up a credit card bill that seemed to take forever to pay off… and then, when it was paid off? Your first thought might be to cut up the card or close the account so you won’t be tempted to run that bill up that high ever again… Don’t do it! At least, don’t do it without looking at the effect that closing a credit card account could have on your total financial picture.
And by your total financial picture, I mean your credit score! That’s right, closing a credit card account can really affect your credit score, and not in a good way!
When you close a credit card account, you are essentially doing two things:
- When you pay the balance in full, the credit utilization rate on the card will then be 0%, meaning that you are using none of the available credit on the card. This 0% credit utilization actually offsets the balances that you may be carrying on other cards, so if you’ve got two credit cards, one with a 75% credit utilization and one with a 0% utilization rate, and you close the one with the 0% utilization rate, you will actually lower your total available credit. Your credit utilization rate will then be 75%, and that’s not good for your credit score at all. Remember, your credit utilization is based on how much of your total available credit you are using… if you suddenly remove a portion of your total available credit, it can really affect your credit score.
- When you close a credit card account, especially one that you’ve had for a long time, you could actually shave years of good payments off your credit history. Lenders like to see a longer payment history, closing an account could remove some of that history from your credit report.
What should you do instead of closing a credit card?
First and foremost, you should look at any annual or monthly fees that you may incur just for having the account… if there are fees, and you don’t need the info on your credit report to maintain a good credit score, then by all means close the account, or even consider closing one account and opening one with another credit card provider who won’t charge any fees. You might even qualify for a lower interest rate!
But, on the other hand, if you do need the info on your credit report, and there are little or no costs associated with keeping the account open, then keep the credit card. Just be sure that you put the card away so you aren’t tempted to make any impulsive purchases!
Keep the balance low and keep your credit score high!