Not that long ago, I was pretty fastidious about how I had my financial accounts set up, so much so that I was bent on consolidating everything from bank accounts to mutual fund accounts to credit card accounts. Little did I know that there are consequences to being so gung-ho about organizing, simplifying and downsizing everything. This is because credit card accounts shouldn’t be treated like clutter. You can’t just think about doing away with them without giving it some careful thought.
At one point, I was in a situation where I pondered about what to do with a particular card. I carried a MasterCard credit card that I’d had for several years and which had an outstanding balance on it (it had been there for some time). But I eventually managed to completely pay it off. I then decided I no longer wanted to use it. So I found myself having no intention of using the card again and thus, I got ready to cancel it with the issuing company.
But before I went ahead with my plans, I studied my options. It helps that I write about a lot of financial matters because I came across information that stopped me from possibly making an error. I realized that canceling my card may not be the best thing to do. It’s a good thing I held off — and here’s why.
Things To Consider Before Canceling Your Credit Cards
If you are thinking about canceling one or more credit cards you’ve paid off, consider the following points first.
1. It can do damage to your credit score.
Your credit score can impact whether or not someone is likely to give you credit in the future. If you get rid of one or more cards, you can actually reduce your credit score enough to squander any chances of getting fresh credit for a while. It can vary between situations and people, but think twice before canceling them.
2. It could harm your credit history.
When we talk about history here, we’re talking about the length of time you’ve owned a credit card. If you’ve carried one for six years, it’s something worth hanging onto: this is quite a long credit history for someone to look back on. But if you’ve only had a card for six months, it gives potential lenders very little to go on. This is why keeping certain cards (such as older cards in particular) can prove to be a very smart decision –- even if you keep them tucked away in the safe.
3. You will have less available credit –- and it could make things look bad.
You may think that having less credit is a good thing and can help you put a brake on your spending habits, especially if you’re one who tends to overuse your credit cards on a regular basis. But you need to think about how future potential lenders will view your situation. Remember that they don’t know that much about you in reality –- they only know what’s on your credit report.
Let’s say you have three credit cards with a credit limit across all of them which totals $15,000. The total amount you owe on those cards is $4,000.
Now let’s say you decide to get rid of two of those cards, and you also decide to keep the main part of the debt on the remaining low interest credit card. This could result in having a total credit limit of a much reduced $5,000. Now suppose you paid off some of your $4,000 debt. Your total amount owed, after paying off $200, is down to $3,800.
Wow –- now things look very different to the potential lenders who take a look at your account. They’ll see that you are using nearly 80% of your available credit, whereas in the first example you were using less than a third of it, even though the actual debt was larger. In this situation, you may want to pause before you cancel your account.
There are also other reasons why you shouldn’t close your account: don’t cancel your card if you’ve got an unpaid balance on it, or if you’ve got no other source of credit (and you know it’ll be tough to get credit any other way).
When Is It OK To Cancel Your Credit Card?
So before you cancel your credit cards, you should sit back and look at the whole picture — both pros and cons — before you make a decision. As you can see from the information above, you might be better off keeping that plastic, but there may also be some situations when canceling cards can be a good thing. So what are those situations? See if any of these conditions fit your case:
- If you simply have way too many cards on hand and you’ve decided to roll over some or all of your outstanding balance into a good 0% balance transfer card, then closing some of your extra accounts makes sense.
- You want to avoid excessive spending and the temptation to rack up credit card debt. If you have trouble controlling your spending, then canceling your accounts may be a relief.
- You want to protect yourself from identity theft and untrustworthy users of your card.
- You want to do away with high interest cards or credit cards that have high annual fees. You know you won’t be using these cards anymore.
Bottom line: know all the facts and weigh the good and the bad that come with closing your accounts.
Created September 14, 2010. Updated May 15, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.