Having credit card is good. But suppose you have a credit card that you recently paid off, and it’s lying down inside of your wallet. It’s a very high-interest card with zero reward program, and you might be feeling relaxed after having no balance on it.
But now the question is, do you need to close totally?
There are some good and bad effects of keeping that ‘paid off credit card.’ So we must decide only after reviewing those pros and cons.
a. If you want to retain the credit card - You must consider:
1. Keeping that card may enhance the risk of minor identity theft. If you’re no longer actively using the card, the risk is quite low. But, if you use that card often, the risk might get severe later on.
Solution - You need to cut off the card asap. By doing this, you’ll be free from any risk of misplacing it. It will be better if you can burn it over an open fire.
2. If you choose to keep the card, there’s a chance that you’ll use it again. If somehow you use it too frequently, you may again fall into debt. It’s right that you’ve already overcome that situation once, but can you have the guts to do it again?
Solution - Remove that credit card details from online store websites. Some retailer websites may remember your card number and PIN, so make sure to clean up your account and remove cookies/auto-fill records from the web browser. As soon as possible, remove all the traces of that credit card from the web world.
b. If you want to close the credit card - You must consider
Closing a credit card account may affect your credit score negatively.
- When you close this card, you’ll also cut off your total available credit. So, your credit utilization ratio will increase. It is because your credit usage remains intact, but your available credit limit reduces.
The negative impact will get away slowly, probably after a year. But, during that time, your low credit score can create problems for your other financial decisions, like:
- Your insurance rates can go higher
- You may have difficulties to get any new, good job
- Lenders can reject your mortgage application
- A good credit score consists of credit mix (10%) and other related factors. So, if you have only this credit card, by closing it, you’ll hamper the balance of your credit mix.
- If that credit card bears the longest credit history amongst all your credit lines, it would be wise to keep it live. Long credit history is another factor that affects your credit score, by approx. 15%.
Solution for the above situation - Before closing that card, you must verify:
- Are you going to shift your job? If yes, don’t close that account right now.
- Applying for a mortgage or a car loan in the near future? If yes, put a hold on closing that card.
- If you’re going to close your one and only card, it’s better that you go for few more cards to maintain the credit mix.
- You also need to reduce your credit usage, unless it’ll hurt your credit utilization ratio.
Keep the account going on until you fulfill all your financial plans. If you don’t have such plans right now, you can close that credit card account.
Read more:
Things you need to focus on while closing old credit accounts
What are those credit score killers that you must avoid?