3 Reasons Why You Should Close a Credit Card
Have you been wanting to get rid of a credit card, but you’ve been hesitant because you’re afraid your credit score will drop significantly? You may have heard that 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 affect 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 may be time to close one of your cards. While charging the latest tech gadget may 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 that closing the card will decrease the length of your credit history, you can rest easy because it won’t. It is true that one item taken into consideration when FICO scores are calculated is the age of your credit, or how long you’ve had credit.
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 have any affect on the length of your credit history.
What will impact your score, however, is that closing a card can lower 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). While this may be a factor when it comes to your score, if you can avoid digging yourself further into debt by closing a card, it may 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 be paying a lot more.
If you’re benefitting in other ways, such as through a generous rewards program, you may want to keep the card. However, it depends on whether the rewards truly make up for the high fees. You may 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 credit card issuer will usually close the account right away and issue a new card. However, if your card has not been lost or stolen, but instead, a business is making unauthorized charges, your best choice is to close the card. Read More