When Does Closing Your Credit Card Account Make Good Financial Sense?
Closing your accounts seems like the thing to do once you have paid off your debt on the account. It removes the temptation to begin using the card again and in today's economy carrying a dozen credit cards no longer makes sense.
Credit cards will never close themselves if you are in good standing with the lender. If you have no balance you will still be issued a new card when your old card expires unless the account has been inactive for a very long time. If the account has an annual or maintenance fee you may end up paying good money for a card you never use.
There are some cautions you need bear in mind. This is not something you should do on a whim but with a carefully thought out strategy. Some things to consider are:
Do not close the oldest account. The oldest card in your wallet may be what adds length to your credit history. You could hurt your credit score if you have a card you've carried for many years and other credit accounts are more recent.
Paying off a credit card does not close the account. You can still be charged fees as the credit card will remain open unless you close it.
Do not go wild when closing your accounts and cancel several cards at one time. Instead, pay down the debt gradually and close an account here and there with sufficient time in between cancellations.
If there is a change you may use the credit account in the future and no fees charged for keeping it, just put the card away in your desk rather than canceling it.
If you consolidate several cards balances into one debt by transferring the debts to a new credit card, do not immediately close the paid accounts.
Even if you have a great introductory offer on a new credit card you should not transfer debt that totals more than 50% of the spending limit on the new card.
Using more than 50% of the spending limit on your credit accounts can damage your credit rating. That number used to be 65% so it's important to know when to stop charging to a credit card.
Closing accounts can prevent you from overspending going forward. It eliminates any worry about credit card theft or fraudulent transactions and stops any annual fees or maintenance fees from occurring.
You can cancel a credit card even if you have a current balance due on the card. If you are focused on paying off your balance, canceling the account simply prevents new charges from being adding to your debt. You will be allowed to pay off the current balance just as you would if the card were not canceled.
If you are applying for a mortgage or car loan, canceling a credit card with a high spending limit and makes sense even if you have a debt to pay on the account.
If you have a card with a spending limit of $20,000 and owe $2000, closing the account frees up $18,000 in what a lender views as available debt.
Another reason to consider closing your account before they are paid off is when the lender changes the terms for the credit card.
Lenders must notify you in advance if your interest rate is going to be increased or additional fees imposed. If you cancel the account those new rates will not take effect and you will be able to pay off the balance over time.
Closing you accounts is part of overall financial management. Old, unused accounts are not useful in building credit but should be cancelled gradually over time.
Keep enough credit card accounts open to provide the spending power you need in the future and pay attention to mailing from your lenders to avoid changes in terms of your credit card use and fee increases. Don't leave without reading our guide on how to get a card without credit check!