Credit Q&A: Should I Close My Credit Card?

If you’re new to the world of credit repair, you’re probably wondering just how, exactly, do credit cards help or hurt your progress. The decision to close a credit card is a tough one. While it may carry long-term benefits, it can also carry risks. Read on to discover when and how to close a credit account. What you learn will safeguard your score.

Why should I close a credit card?

Consider closing a credit card in the event of:

• Separation or divorce. Joint accounts have the power to hurt your credit during a separation or divorce. Sever financial ties by closing these cards as soon as possible.
• Identity theft. If your card has been lost or stolen, your credit provider will help you close the account and issue a new card. While this is usually done automatically, be sure to contact your provider to verify the change.
• Moving out of network. Here’s a scenario: You live in a small town that has a Mom and Pop department store. You recently accepted a job 2,000 miles away and no longer need your department store card. Unless you plan to visit and use the card occasionally, now is the time to close it.
• Legal issues. Here’s another scenario: You recently bought $3,000 worth of tile from a home improvement store for a remodel project. The balance was placed on your store credit card. Unfortunately, many of the tiles were broken upon delivery and the store is refusing to refund your money. You are forced to pursue civil charges in order to recoup expenses. In the meantime, you decide to close your card, convinced you will never do business with the company again.

Why shouldn’t I close a credit card?

There are a few good reasons to close a credit card, but the ones below don’t merit a change. Avoid closing a credit card due to:

• Lack of use. Credit length is a powerful player in the scoring game, representing 15 percent of your credit score. Keep your account current by using it, not losing it!
• Unpaid balances. Closing a credit card won’t erase unpaid balances, so unless you plan to stop using the card entirely, you may as well keep it open.
• Debt precautions. All right, you’re bad with money. Maybe you have problems with impulse control or haven’t learned the basics of personal finance. Either way, closing your card won’t solve the real problem. If you’re worried about overspending, ask your lender to freeze the account until you’ve gained the confidence to begin using it again.

Will closing a card hurt my score?

It can, yes. Closing a credit card can damage your credit by:

• Affecting your credit utilization ratio, or the amount of debt you owe vs. your total credit limit. Consider the following example:

Gill has two credit cards:

• A Visa with a $5,000 limit and a $1,700 balance.
• A MasterCard with a $7,000 limit and a $1,450 balance.

Total debt: $3,150

Total credit limit: $12,000

Total Utilization ratio: 26.2 percent

Let’s assume Gill decides to close his MasterCard. As we learned, his debt is not erased, but his total credit limit is reduced to $5,000, raising his utilization ratio to 63 percent.

Avoid Gill’s mistake by considering the impact of your decision. Pay off a card balance before closing it and ask other lenders to raise your credit limit in order to eclipse the loss.

• Limiting your credit length. Old credit is the best credit. Lenders rely on your financial past to predict future habits and risk. Closing an old credit card won’t erase your history, but it will end the usage of an old account, a factor that could hurt your credit score.

The bottom line: Closing a credit card is a big decision. Before taking the leap, talk to a professional about how the change may affect your credit score.