Credit cards are remarkably easy to apply for and receive. All it takes is a about a minute online, and with instant approval, a card will arrive in the mail within days. Additionally, so many credit cards now come with valuable sign up bonuses that it is easy for cardholders to accumulate quite a portfolio of plastic. At some point, most cardholders will become overwhelmed by all their open accounts and may wish to close some. This can be a good idea, but in many cases, it is better just to keep the cards open.
Closing revolving charge accounts can have a negative impact on consumer’s credit score for two reasons. First, closing an account reduces cardholder’s available credit. Therefore, for a given level of debt, the cardholder’s debt to credit ration will go up. Close multiple accounts and that figure can soar. In addition, closing accounts reduces cardholder’s credit history, especially if the cards cancelled have been held for many years. Since the average length of credit history is another factor in credit scores, reducing it will hurt one’s credit.
Next, cardholders should examine their reasons for cancelling the card. If the cardholder has substantial debt, obviously it will still have to be paid off whether or not the card remains active. By closing the account with pending debt, the cardholder will risk having a negative debt to credit ration. In this case, simply cutting the card up may solve the problem of over spending, but calling to cancel the account will hurt the cardholder’s credit score.
Another problem with closing a credit card account is that the cardholder may forfeit any rewards. For example, the Costco card from American Express only disperses cash back in February. Cancel the card before receiving the cash back voucher and it will not be received. Other,bank operated loyalty point programs have terms that negate access to accumulated points once the cardholder has closed the account.
Finally, consider the positive consequences of keeping an account open, but inactive. Cardholders will extend the length of their credit history and retain access to valuable benefits and perks. If the credit card has no annual fee, there is really nothing lost by continuing to leave the account open.
By carefully considering all of the consequences of closing a credit card account, consumers can make the best decisions for their individual circumstances.