You may have heard conflicting messages as to whether or not you should close credit card accounts you no longer want. That’s because there are some advantages to keeping a credit card account open. If you decide closing a particular account is the right move, be careful how you do it. If you still have a balance on the card, cancelling it may impact the interest rate.
Cancelling a Card
When you charge something on a credit card, you are borrowing money from the credit card company, which then charges you interest on the borrowed funds. That’s how credit card companies make money. As long as there is an unpaid balance, it means you still have some of the money you borrowed, so the credit card company continues to charge you interest — even if you cancel the card and close the account.
Closing a credit card account with a balance may prompt the credit card company to hike your interest rate. Not all companies do this, but some do. This may not seem fair, but keep in mind you are now an ex-customer. The credit card company doesn’t have much incentive to be nice to you. You might consider paying down the balance on the credit card first, and only then notifying the company you are closing your account.
If you decide to close a credit card account with a balance, there are some steps you should take to protect yourself. First, check your credit report to make sure the account is updated to reflect the closed status. Next, review each monthly statement and keep a sharp eye on the interest rate. If your interest rate goes up, call the credit card company and ask for the rate to be lowered to its original level. The company may agree. For example, a department store might not want to lose you as a customer, so it may cut the interest rate to keep you happy.
Interest isn’t the only thing to watch out for when you close a credit card account. Closures can lower your credit score. Having an outstanding balance when you cancel the credit card won’t hurt you. It’s the account closing itself that can be a problem. Closing an account may increase your credit utilization ratio, which is the percentage of your available credit you have actually charged on all of your credit cards. A low credit utilization rate helps your credit score, so be careful about increasing it. You need to keep your credit utilization under 30 percent, according to Bankrate.com.
The other concern is the length of your credit history. The longer you have used credit, the more it helps your credit score. Closing a long-standing account, with or without a balance, may shorten your credit history and lower your credit score. Fortunately, there’s an easy fix for this problem: never close your oldest credit card account. If you want to pay it off and stop using the card, that’s fine. Just keep that account open.