Should you consider closing a credit card?
Credit card debt happens, and if you have it, you probably don’t feel good about having it, so when you’re trying to figure out how to pay off the debt you’ve accumulated, it’s understandable to just consider closing the credit card. If you don’t have the card anymore, you can’t use it, right? Problem solved.
Closing your credit card is an option, yes, but it may not be the right decision to make. There are some benefits associated with keeping your credit card open, even after you’ve racked up debt, that are worth considering.
To help you make an informed decision about your next credit move, here are some things to keep in mind when you’re in credit card debt before deciding whether or not to keep the card (or cards) you’re on. have a balance.
Can you close an account when you have a balance?
Even if you have an outstanding balance on your credit card, you can choose to close it. You will still need to make payments on this card even after the account is officially closed, but you can eliminate the risk of increasing your debt by not being able to use the credit card anymore.
If you choose to close the card, you will continue to receive monthly statements showing your current balance, the amount of interest accrued and the minimum payment you must make. Even with the card closed, interest will continue to accrue until you pay off the entire balance. Your legal requirements for repaying debt and interest charges will not change at all.
On the plus side, once you close a card, the card issuer won’t be able to charge you higher fees than what you’re currently paying (like late fees) and they can’t introduce new fees.
Are there any downsides to closing a credit card?
One of the benefits of keeping a credit card open even after you’ve racked up a decent amount of credit card debt is that it can actually help improve your credit score. We know having a card with a balance isn’t a good thing, but hear us out.
When you close a credit card, you can increase your credit utilization rate. Your credit utilization ratio compares the amount of credit you have to the amount you use. The lower this ratio, the more your credit score will benefit. When you close a credit card with a balance, you reduce the amount of available credit you have while keeping the same amount of used credit, which can really increase your credit utilization rate. Locking the credit card and not using it until you’ve paid off your balance can help you keep your credit utilization ratio high without adding more debt to your plate and effectively reducing it.
Opening different types of credit accounts also improves your credit mix, which improves your credit score. Credit scoring models want to see that you can handle a few different types of credit. Let’s say you have a student loan, a car loan, and a credit card. If you close your credit card account, you reduce your credit mix and your credit score may take a hit. If you keep your credit card open and add a home loan, you can improve your credit mix and credit score.
Are there any benefits to closing a credit card?
On the other hand, there are times when you may decide that the pros of closing a credit card outweigh the cons. For example, if you pay a high annual fee to use the card and you don’t intend to use it anymore, you’ll probably want to cancel the card and save your money. Having fewer credit cards open can also make it easier to manage your finances and allow you to focus on using the credit cards that offer the best rewards.
Speaking of rewards, if you’ve accumulated reward points, cash back, or other perks and haven’t redeemed your rewards yet, you may lose them once your account is closed. If you decide to close a credit card, be sure to redeem any pending rewards first.
Again, the main benefit of closing a credit card that has resulted in debt is that you will no longer be able to use it and add to that debt. However, it’s not really necessary to not use the card at all to get your debt under control. You just need to be honest with yourself about your spending habits and whether or not you’ll be able to make monthly payments in the future so you don’t increase your balance.
The take-out sale
There’s no right or wrong answer as to whether or not you should close a credit card that you have a balance on – it really depends on the individual. If you manage not to increase your debt, keeping the account open can be good for your credit score, but in some cases the cost of annual fees and the risk of increasing your balance are just too high. Think carefully about how you can manage this card and future credit cards to ensure you reap all the benefits of credit cards without having to worry about interest payments, fees, or a bruised credit score. .