Finally you have made the last payment on your credit card and the remaining balance is $0. Feels great doesn’t it? But now what? Should you cancel the card and cut it up or should you keep it, and the fees associated with it, for future emergencies?
Money managers and debit relief specialists are of differing opinions on what to do next. Depending on your personal situation, here are some pros and cons of canceling your credit card(s) to consider:
- Prevents you from abusing them. If you are struggling financially, having the temptation of a zero balance credit card in your wallet is too great. Your credit rating may take a hit for a while but remember non-payment on outstanding debt is more detrimental to your credit balance than closing the account. Sometimes it is worth it to risk a little to save a lot.
- Less cards means less bills to pay and keep track of. We have already written about the relationship between debt and stress and the reduction of cards may be the panacea needed for your stress level.
- Avoid paying interest and fees. Credit card companies profit from charging interest, late fees, cash advances, and out-of-country transactions. All these fees make using a credit card more expensive than using cash or cheques for payments. Look at your monthly statements and add up all the extra fees. If you aren’t able to afford these fees, perhaps it is time to reconsider the benefits of the card to using cash for more transactions.
- Closing the credit card account can hurt your credit score. Lenders take a hard look at the ratio between the balances on your various accounts and your total available credit. Your credit score is calculated on a debt-to-credit ratio so when you close an open account, those credit lines are no longer factored in. Your debt as a percentage of available credit will increase and that hurts.
- Closing your oldest accounts. Lenders see long held accounts as proof that you are a responsible cardholder and canceling the card may affect your ability to reapply in the future. Plus, your oldest account will probably have the highest credit limits which quite possibility will not be available to you if you have canceled in the past. Also did you know that 15% of your credit score is determined by how long you have been borrowing? It effectively closes a period of time in your credit history and thus shortens it.
- Reduces Your Total Credit Capacity. In addition to losing out on current and future rewards and other perks that the card may offer, canceling the card reduces your total credit capacity by negatively impacting your utilization ratio. It makes sense that closing the account reduces your total credit capacity by an amount equal to the limit on the card but ask yourself – how long did it take for you to build up that amount of credit? Are you willing to start from scratch with that card if you re-apply in the future.
If you chose to close the account, ensure that it is done correctly. Holly Johnson of thesimpledollar.com has a great step-by-step to follow.
- Cancel any automatic charges linked to the card.
- Pay your credit card balance in full.
- Redeem all your rewards.
- Call your card issuer to cancel.
- Check your credit report to make sure that the cancellation went through.
Also, a final note of caution before doing a credit card purge to streamline your financial responsibly. If you are planning to apply for credit in the near future for a major purchase, such as a vehicle or a mortgage, you want to be sure that your utilization rate doesn’t change, and cause a drop in your score, while you are in the application process