5 Reasons Why You Should Close a Credit Card
Have you wanted to get rid of a credit card, but you’re hesitant because you’re afraid your credit score will drop significantly? You might have heard it’s never a good idea to close a credit card, but this isn’t true. There are some situations where it’s actually in your best interest to get rid of a card, despite whatever temporary effect it might have on your credit score. Here are five situations where it’s OK to break the rules.
1. Your spending has gotten out of hand
If the thought of all that available credit makes you want to spend, it might be time to close one of your cards. Although charging the latest tech gadget might feel good now, it won’t feel as good when the bill arrives. Holding on to that extra credit card is not worth the added debt.
If you’re worried closing the card will decrease the length of your credit history, you can rest easy because it won’t. It is true that your FICO score considers how long you’ve had credit. And the longer you’ve had credit, the better. The length of your credit history accounts for 15% of your FICO score. However, closing a card will not affect the length of your credit history.
What will impact your score, however, is lessening your amount of available credit. Credit scores are affected by what’s a called a credit utilization ratio, which compares your total available credit against your balances (or the amount of credit you’ve utilized). So though this might be a factor when it comes to your score, if you can avoid digging yourself further into debt by closing a card, it might be worth it in the long run.
2. Your card has a very high interest rate or annual fee
Before closing your card, you can try to negotiate for a lower rate or fee. If your efforts are not fruitful, it’s time to move on. High fees will lengthen the time it takes to pay down your debt. Consequently, you’ll pay a lot more.
If you’re benefiting in other ways, such as through a generous rewards program, you might want to keep the card. However, it depends on whether the rewards truly make up for the high fees. You might also want to consider joining a credit union, which tend to offer lower interest rates on credit cards.
3. Your credit card was charged fraudulently
In situations where your credit card was stolen or lost, your card issuer will usually close the account and issue a new card. However, if a business is making unauthorized charges, your best choice is to close the card. For example, if you signed up for a monthly service and then decided to cancel, but the business is still charging you even after you’ve notified it about the issue, keeping the card might not be in your best interest.
4. You’re getting divorced
When you and your spouse got married, you likely combined your finances. However, if you’re a joint credit card account holder with your spouse and you decide to go your separate ways, you’ll want to close the card. It’s in your best interest to close the card because you’ll be responsible for any charges your former spouse makes. This is true even if your divorce decree states your spouse will be responsible for the bill. Your credit card issuer will still hold both of you responsible for payments.
5. The card doesn’t fit your spending habits
Some credit cards are tailored to specific people. For example, there are rewards credit cards for people who travel a lot or those who often use their cards to fill up at the gas pump. However, if you don’t travel as much as you used to, these types of cards might not be such a great deal. You’d be better off closing those cards if you don’t use them, especially if they have annual fees. If you don’t, it’s likely your credit card issuer will close the card for you due to inactivity.
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