Closing down a credit card account might seem like the perfect ending for paying off the balance. However, before you make the final call, there are a few pros and cons to keep in mind.
Advantages of Closing an Account
Everyone who considers closing an account comes to this point for different reasons. Some are no longer interested in using old credit card accounts since stores close, reward offers change, or a job or location change may render some cards no longer as beneficial as they had been in the past.
These are a few reasons it may be advantageous to close your credit card account.
- To eliminate fees: Some credit cards charge annual fees and other charges even if you are not using the card. When you are not using the card frequently enough to justify the fee, it may be worth considering its elimination.
- To reduce the risks of identity theft: Unutilized credit cards may pose a risk for identity thieves. You do not necessarily need to close the account to help prevent (or limit the impact of) identity theft, but closely monitor all credit cards accounts, even the ones you are not using, for suspicious activity.
- To reinforce better spending habits: Depending on how many credit cards you have and your current spending habits, it may be best to close a zero balance account to ensure it is no longer used.
- To better handle a separation of a joint account: The best solution for shared accounts during a divorce or separation may be to close them and open individual credit accounts.
Disadvantages of Closing an Account
Of course, there are a few disadvantages to closing your credit card accounts that may make you reconsider. Do not close your account until you understand the impact it may have on your credit score.
These are a few potential disadvantages to consider.
- Avoid negative credit utilization consequences: Your credit utilization ratio is the amount of credit available to you compared to the amount of credit you are currently utilizing, and is one indicator of financial health. For instance, if you have a credit limit of $10,000 on your credit card and you owe $1,000 on the card, you are only utilizing 10 percent of your available credit on that card. Ideally, creditors prefer to see your credit utilization below 30 percent. If you have one card that is completely paid off, it improves your overall ratio. In other words, the more zero balance cards, within reason of course, you have open, the better your credit utilization ratio looks to lenders.
- To take advantage of 'aged' accounts: Most credit cards that you’ve paid down are what the credit industry views as 'aged' accounts. The longer you have had an account, especially one in good standing, the better it looks for your credit history. Closing the account makes your credit history appear shorter which may have a negative impact on your credit score. If you feel you must close credit card accounts, consider closing newer accounts before closing accounts that have a lengthy history.
Rules of Thumb for Closing Accounts
Before you close a credit card account, there are a few things you'll want to do to close your account in a way that has the minimal negative impact on your credit – and so that you get the best possible experience from closing the account.
- Redeem all your rewards. They disappear when you close the account.
- Pay off your entire balance. Do this instead of transferring your balance to another account.
- Call the number on the back of the card and notify the company you want to close the account. Confirm that they have closed the account over the phone if possible.
- Destroy the card. Consider investing in a shredder that destroys paper and credit cards. Otherwise, use scissors to destroy it thoroughly.
After you have officially canceled the card, wait a few months, then check your credit report to verify that it shows up as a closed account.
With all this in mind, if you do decide to close your credit account, make sure you go about it the most responsible way, balancing the needs of you and your credit score.