Should You Close Your Credit Card Account?
I get this question a lot:
Gail, love the show. I’ve been walking around with dozens of credit cards and department store cards in my wallet for the past few years. And they seem to multiply all on their own. When I add up all the money I could spend, it makes me very nervous, especially since my sister-in-law’s wallet was stolen and she found out that her cards were being used by someone else. Yes, she did call the cancel, but forgot about the department store cards. So I was going to cancel all those cards when someone told me that if I do I’ll ruin my credit history. So now I don’t know what to do? Help!
Okay, you’ve finally paid off a credit card and now you’re wondering if you should close the account or keep the card active. Or you’ve reassessed how you plan to use credit as a tool and you find you are overstocked in the credit card department. Or you’ve come to the realization that you just have no self control and having all those cards is an invitation to dig a hole. So should you cancel the accounts? Well, it depends.
How many credit cards do you have? If you have more than one or two cards, then closing the account may make sense for a couple of reasons:
- As long as the account is active there’s an ID theft potential.
- As long as the account is active you could end up using it again.
If your track record with revolving credit has been a little shaky, then maybe the temptation to spend will get the better of you down the road, and closing the card now will solve that problem. And if you’re concerned about your exposure to ID theft, you may want to eliminate this credit.
You might also want to eliminate this account if you’re planning on doing some “good” borrowing, and don’t want to be over-exposed credit-wise. Ya see, every piece of credit is taken into account when a lender is deciding whether or not to give you more credit. If you have too much revolving credit – credit you can tap at any time for any purpose – the lender must take that into account before giving you more credit.
While this “rule of lending” may have been shelved when lenders were rabid to extend credit to anyone for anything, with the recent tightening of credit there’s little doubt this rule is coming back into force. So if you’ve got a bunch of credit cards, they’ll add up all your limits – LIMITS, not outstanding balances – and do their calculations as if you have borrowed all that money already. Why? Because you COULD!
There are some downsides to cancelling a credit card account. Y’all know I’m not a fan of how the credit score is arrived at since some of the criteria used to create your credit score relate to how “profitable” a customer you’ll be. I, for example, do not have the best credit score because I refuse to carry a balance on my credit cards, and people who do carry a balance and pay regularly have higher scores because they’re more profitable.
The reality is that cancelling a card can create a short-term dip in your credit score, which in turn can affect your cost of borrowing. So you have to time the cancellation so that either you do your “good” borrowing first, or your credit score has enough time to recover.
If you don’t want to use the card, but you don’t want to create the blip on your credit score either, you can always cut up the card so you can’t use it. Or throw it behind the refrigerator, which means if you go for the card you’re also planning to clean!
Ultimately, having access to too much credit is never a good thing. And while credit cards are a useful tool, most people find a way to misuse that tool by carrying balances, racking up over-limit fees, or over-exposing themselves. Deciding to clean house and trim back on your credit exposure may hurt your credit score in the short term, but it could be a very good decision in the long run.
Of course, if you’re not borrowing at all for anything other than your mortgage and perhaps a car payment, and you use and repay your credit cards every single month, you’ll have a strong credit score that can take the slap of a few cancellations. And since you’re not borrowing anyway (hey, Debt Free Forever! Right?) who cares if your credit score dipsidoodles for a few months.