The Ins and Outs of Closing A Credit Card Account
Why You Should Consider Keeping Your Credit Card Account Open
Many consumers have a credit card account that they want to close for one of any number of reasons. After deciding they no longer want to use a particular card, they immediately call the credit card company to cancel the credit card account. However, while there are indeed valid reasons to close some credit card accounts, canceling a credit card account is not always a wise idea.
Your Credit Rating Matters
Canceling a credit card can negatively affect your credit rating. In most cases, you are better off paying off the credit card but leaving it open. The length of time that you have credit card accounts established has a positive impact on your credit rating, as does the amount of credit you have available. If you decide to cancel a credit card that you have had for ten years, you are closing off that established history and are lowering your available credit ratio.
A Real-Life Scenario
To help you better understand how canceling a credit card account could have a negative effect on your credit score, look at this scenario. Let’s say you have two credit card accounts and each of those credit cards has a $5,000 credit limit. Each card is carrying a balance of $2,000, which you are slowly paying off.
Credit card account number one has an interest rate of 4.9 percent while credit card account number two has an interest rate of 9.9 percent. You just opened up credit card account number one four or five months ago and you’ve been paying 9.9 percent interest to credit card account number two for more than two years. You decide to transfer the balance on credit card two to the credit card account with the 4.9 percent interest rate. Good decision so far.
Now that you have transferred all of your credit card debt to one, low-interest credit card account you’re in pretty good shape. You decide to cancel credit card account number two now and just keep credit card account number one open.
Bad move.
As soon as you cancel credit card account number two, your credit limit drops from a combined $10,000 to only $5,000 and instead of having an available credit of $6,000 you now only have $1,000 in available credit. In a creditor’s eyes, that’s not very good.
Another problem is the fact that now you don’t have an open credit card account with an “established” creditor relationship. You’ve only been with credit card number one for a few months. You just shut down a long-term relationship with your other credit card, and that’s also going to make your credit score take a hit.
By keeping credit card open, you can continue to build and improve your credit history even if there is no activity on that credit card. Discuss your options with a customer service representative of your credit card company. Some credit card companies will allow customers to place a hold on their credit card account. This prevents future transactions from occurring but, since the credit card account is still technically open, your credit score doesn’t have to suffer.