When To Close a Credit Card? (And When To Keep It Open)

Deciding whether to close or keep a credit card open is important for maintaining a healthy financial profile. Depending on various factors, closing a credit card can have positive and negative implications. In this article, we will explore the circumstances that warrant closing a credit card and those where it may be beneficial to keep it open. By understanding the key considerations, you will understand when to close a credit card in a better way and make a correct decision. 

How to Decide Whether or Not to Close a Credit Card

It is important to carefully evaluate various factors before deciding whether to close or keep a credit card. Considerations such as credit utilization, the age of the card, available credit, annual fees, spending habits, and future credit need all play a role in determining whether closing the card is the right choice for you. Let’s look at some factors you must consider when closing a credit card. 

Here are six questions to consider when deciding whether or not to close a credit card: 

1. How Long Have You Had the Credit Card? 

The time you have held a credit card is important when deciding whether to close it. Your credit history length is a crucial component in calculating your credit score. Lenders often view a longer credit history as more favorable, indicating a responsible credit management track record. Closing a credit card account you have held for a considerable period could potentially shorten your credit history and hurt your credit score.

2. What Is Your Credit Limit? 

The credit limit assigned to your credit card is another essential aspect when deciding whether to close the card–even if you’re not looking to use the card. This is because your credit limit represents the maximum credit available on that particular card. Evaluating the credit limit can help you determine the potential impact of closing the card on your overall credit utilization ratio and credit score. Learn more about what the credit utilization ratio is and how it affects your credit score. 

3. Does the Card Offer Any Perks? 

When deciding whether to close a credit card, it’s important to consider the perks and benefits associated with the card. Some credit cards offer cashback programs, travel benefits, or exclusive discounts just for being a cardholder. For example, some cards come with members-only shopping portals where memberships automatically get an additional discount just for using their card with certain major retailers and brands. Others include perks like free airport lounge access, free checked bags on flights, use of business class check-in and free upgrades to first class (when available). 

Evaluating the perks and benefits of a credit card is crucial in determining its overall value. By carefully weighing the perks against associated costs, you can decide whether the card’s benefits justify keeping it open or if closing it is more financially advantageous.

4. What Is the Annual Fee? 

Another factor to consider is whether or not your card has an annual fee, and if so how much is it? While it may make sense to keep an old card open for the credit history or keep a card with a high limit open to improve your credit utilization ratio (both of which help improve your credit score), it’s not a great move if the card has a high annual fee–especially if you’re not taking advantage of the benefits or perks the card offers. 

5. Do You Use Your Card? 

One crucial factor to consider when deciding whether to close a credit card is how frequently and effectively you use the card for purchases and payments. Analyzing your card usage patterns can help you determine whether keeping the card open is beneficial or if closing it aligns better with your financial habits. 

6. Will You Be Tempted to Rack Up a Balance? 

Considering your spending habits and financial discipline is crucial when deciding whether to close a credit card. You should assess whether keeping the card open will increase the temptation to accumulate a balance.

Alternatives to Closing a Credit Card  

Instead of closing a credit card, there are alternative options to consider that can help you manage your credit effectively and maintain a healthy credit profile:

• Pay off your balance in full each month to prevent paying interest.
• Use the card sparingly for necessary expenses to keep it active without accumulating excessive debt.
• Based on your good payment history, negotiate with the card issuer for a lower interest rate.
• Downgrade to a no-fee card the same issuer offers to eliminate the annual fee.
• Keep the card open with minimal usage, making occasional small purchases and promptly paying off the balance.
• Transfer the balance to a card with a lower interest rate or a promotional 0% APR offer.
• Explore alternative credit options such as a secured credit card or a personal loan to meet your borrowing needs while managing credit responsibly.
• Regularly monitor your credit card statements and credit reports to stay aware of any potential issues or fraudulent activities.
• Seek advice from a financial advisor or credit counseling service for personalized guidance on managing your credit effectively.

How Closing a Credit Card Affects Your Credit (Good or Bad)

Closing a credit card can positively and negatively affect your credit, depending on various factors. It’s important to understand these potential impacts before making a decision. 

1. Positive Effects

• Simplified credit management: Closing a credit card can streamline your credit portfolio, making tracking and managing your remaining credit accounts easier.
• Debt reduction: If closing the card helps you resist the temptation to accumulate more debt, it can contribute to a healthier financial situation and potentially improve your creditworthiness in the long run.
• Lowered credit utilization ratio: If you have low balances on your remaining credit cards and closing the card does not significantly impact your total available credit, your credit utilization ratio may decrease. Lenders generally view this positively.

2. Negative Effects

• Reduced credit history length: Closing an older credit card can shorten your average credit history, which is a crucial component of your credit score. This may negatively impact you, particularly if it’s one of your oldest accounts.
• Increased credit utilization ratio: Closing a credit card reduces your total available credit. Having existing balances on other cards can lead to a higher credit utilization ratio, which may negatively affect your credit score.
• Altered credit mix: Closing a credit card can affect the diversity of your credit mix, which is another factor considered in credit scoring models. Lenders can view a more diverse credit mix (e.g., having both credit cards and installment loans) favorably.
• Potential impact on credit score: While the specific impact varies depending on individual circumstances, closing a credit card can potentially cause a temporary decrease in your credit score due to the abovementioned factors.

Closing a credit card on your credit can be good and bad. Before deciding to close a credit card, it’s important to consider the potential consequences, such as the impact on credit history length, credit utilization ratio, and credit mix.

How to Close a Credit Card in 7 Steps  

Closing a credit card requires a systematic approach to ensure a smooth and proper closure. Follow these steps to close a credit card effectively. 

1. Before closing the credit card, pay off any outstanding balance in full. 
2. If your credit card has accumulated rewards points, cashback, or other benefits, redeem them before closing the account. 
3. Call the customer service number on your credit card’s back or visit the issuer’s website to initiate the closure process. Inform them of your intention to close the credit card account and request the necessary steps.
4. They may require you to submit a written request, complete an online form, or undergo a specific process. Follow their instructions carefully to ensure proper closure.
5. After initiating the closure, sending a written letter or email to the credit card issuer confirming your request to close the account is good practice. 
6. Once the credit card account is closed, monitor your credit report to ensure the closure is accurately reflected. Look for any remaining balances reported as “closed by consumer” and ensure the account status is updated accordingly.
7. Once the account is closed, destroy the physical credit card to prevent misuse or identity theft. 

Bottom Line 

Finalizing whether to close a credit card requires careful consideration of various factors. While closing a credit card can simplify your credit portfolio and help manage your debt, assessing its potential impact on your credit score is essential. Keeping a credit card open can be advantageous for maintaining a longer credit history, improving credit utilization, and preserving the benefits and rewards associated with the card. 

However, if a credit card no longer serves your financial needs, carries high fees, or tempts you to accumulate debt, closing it may be a good option. Ultimately, weighing the pros and cons, evaluating your financial goals, and making an informed choice that aligns with your overall credit management strategy is crucial. Remember, consulting with a financial advisor can provide valuable insights and guidance tailored to your circumstances.

Frequently Asked Questions (FAQs)