Closing down your credit cards might seem to be a very fruitful decision as you just want to cut down a big liability.
We believe that unused credit cards are a burden, and it’s better to get done with them for good.
But is it really that sensible to close the card you don’t use? “Think twice” is the phrase that comes to my mind whenever I want to close mine.
The subject of today’s article is common. Most of us have come across several pages showing the “Dos and Don’ts of closing credit cards”. But we only get confused the more we read.
So, I will try to simplify this post as much as possible, and even see it for myself, how to successfully close a credit card.
There are many factors that work behind the scene when it comes to credits and debts. Needless to say, we have the big determiner called credit score.
The credit score speaks about our credit behavior, and having a blank record of consumer credit will highly affect the score! So, if you close your card, then the credit report will not show any continuing credit line on your credit report, and that will be seriously reflected by your credit score!
Why should you keep at least one open credit card account?
Many financial professionals argue that it is good to have at least one credit card account open, which is reported periodically to the credit bureaus.
The most obvious reason behind this is that it helps to maintain a proper credit profile for you. A good credit account report influences your credit score.
Consider maintaining your payments on a regular basis and try to keep your credit utilization ratio low.
So, if you have only one credit card with you, then probably closing it is not a good idea. Rather you should use it sensibly and see that the utilization ratio for it is not exceeding 35%.
The utilization ratio is a percentage calculated by the balance due on credit accounts divided by total available credit.
So, if you have one credit card with a limit of $5000 and your outstanding balance is $2000, then the ratio is 2000/5000, which is 40%.
That was just an example. Your target should be to keep this ratio between 30-35%.
The credit utilization ratio is a big contributor to credit score and closing the only account you have will result in 0% ratio, which might have a negative impact on your credit score.
Why should you keep your oldest credit account open?
Another aspect to keep in mind is to have your oldest credit card open, as long as you can, unless another card of yours has the potential to replace it!
Our credit reports are made up of credit history. Every lender will have a look at your past to see how responsible you can be with a new line of credit in the future.
If your credit report displays a credit account with a good and long credit history, then you will have more advantage while taking out a new loan.
But the only thing that’s important is that the record of this old credit line should be noteworthy and clean!
If you believe that this old card is a nuisance and you don’t have any decent record to show off with it, then probably closing this credit card is a better idea!
What is residual interest and how can it be a problem?
You should clear your balance in full before you close your credit card. It’s so because you will otherwise have a balance with no available credit limit, which might sound you have maxed out your card!
| Here comes the point of residual interest. It is the interest that gets accrued on credit accounts even for a small period of time, like say for one minute as an example?! |
Suppose today your credit account bill has been issued and it stands at some $500 balance. Then by tomorrow, your bill will slightly increase, and no matter how hard you try, you can’t pay off the account in full, as interest will grow even for seconds. This is called residual interest.
Hence before you close your card, ask the company’s REP and your due balance on the specific date you will payoff your card debt and close it permanently!
Here are the dos and don’ts of closing credit card:
- Do see that you’ve paid off the balance in full with the residual interest in mind and then close the card.
- Do see that it is well reported to the credit bureau that your account is closed with a good marking.
- Don’t close the oldest credit card, if it is not much of a hassle for you, and if it doesn’t inflict your lifestyle and financial liabilities.
Don’t close the only credit card you have, as if you manage it responsibly, it might help you have a good credit score and credit profile.