Pros & Cons of Closing Credit Card Accounts

Just cutting up a credit card doesn't close an account.
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Having good credit makes your life easier when it comes to qualifying for low interest rates on loans and credit cards. Good credit facilitates rental applications, utility hook-ups, low-rate auto insurance and setting up cell phone service. Some employers look at your credit history in their decision to hire you. Although credit cards can help you establish and build credit, having more cards than you need or that are not well managed can compromise your financial health. You may find that the best way to avoid further debt is to close these accounts.

Pro: Prohibits Potential Debt

Managing debt is a common problem, especially for debt accruing from credit card purchases. To ensure that you are free of future debt, eliminate multiple cards and only maintain cards that assist you in building a good financial history. To cancel such credit card accounts, call the phone number typically found on the back of the card and inform the issuer that you wish to cancel your card. This will help you control your spending and get back on track to leading a debt-free life.

Pro: Improves Credit Score

Closing some credit card accounts, particularly store cards with high rates, can work in your favor when it comes to credit scores. Having fewer cards means fewer bills to pay and keep track of, which goes a long way in streamlining your personal financial management. Whether you consolidate your high-interest cards into a few low interest ones or pay them off altogether, you have taken a step toward improving your credit score. Verify that the issuer will report the account closure to the credit agencies as having been closed "at the customer’s request."

Con: Credit Timeline Erasure

In the credit scoring system, typically 15 percent of your credit score is attributed to the length of your credit history. When you cancel a credit card account that you've had for a long time, you shorten your credit history, even though any late payments associated with the card continue to be factored into your score.

Con: Reduces Total Credit Capacity

In addition to losing out on the rewards and other perks you earn when you use a credit card, canceling the card may negatively impact your utilization ratio. Closing the account reduces your total credit capacity by an amount equal to the limit on the card. Because 30 percent of your credit score is derived from a debt-utilization calculation, canceling a card can negatively affects your score. Request an increase on the credit limit of another card to counteract this affect.

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