Like many of us, you’ve probably been doing a lot of excess online shopping while stuck at home. It might be time to limit your purchasing, and you can do that by closing some of your credit cards.
But it’s not as simple as just cutting up the cards. You need to properly close a credit card account down to keep it from negatively affecting your credit score — which can happen anyway if you’re not careful with which cards you close.
Read on for 5 things to consider before closing a credit card account. Keep your credit score healthy, and keep credit card rewards (tap or click here for apps to keep track of your credit card rewards) while cutting down on your spending.
1. Keep your oldest card
The card you’ve had the longest is the one that you should keep no matter what. The older your account, the better it can show your credit history and that’s what banks and other creditors want to see.
Those giving you loans want to see that you have a history of paying off debt, after all. And your oldest credit card shows a long history, which is good, especially if you’ve stayed on top of it over the years.
So think about the age of your cards if you’re going to close down some accounts, and close the newest ones. Keep that credit history nice and long, so you can increase your chances of other loans and better interest rates!
2. Which card has the highest credit limit?
The next thing to consider is which of your credit cards has the highest credit limit. You’ll want to hang onto the ones with high limits. Now, if you have issues with spending, this may be a bit counterproductive. But you need to consider your credit utilization rate.
Your credit utilization rate is the ratio of your credit card debt to your credit card limits. When you open a new credit card account, you increase your limit and don’t yet have new debt. So the ratio is in your favor.
Closing cards with high limits can push you to the opposite side of the ratio, causing your debt to loom a lot larger. Tap or click here to find out how debt collectors can now message your DMs looking for payments.
Creditors consider this ratio when lending money, so you want to keep that ratio in your favor. Keep your cards with higher limits to help ensure that.
3. Are those fees worth it?
Credit cards with high fees are probably the most tempting to get rid of, and that probably benefits you in the long run. But you should also consider what rewards a card gets you on top of the fees before canceling it.
A card with an annual fee may allow you to earn points at nice restaurants, or while traveling, ultimately saving you money with upgrades or future discounts. Some fees may help you cover insurance costs on trips, too.
But if you don’t use these rewards, then you’re right that the high annual fee isn’t worth paying. A card costing you more than it’s getting you isn’t worth keeping around.
4. Can you pay the balance before you cancel?
When you cancel a card, the balance you owe on it doesn’t go away. Instead, that unpaid debt just tanks your credit score, so you should only cancel a card once you have the balance paid off.
This means you should only cancel a credit card whose balance you can actually pay off in full. Tap or click here for some online calculators that can help you take care of your life, including your finances.
Paying off in full doesn’t mean you have to pay every cent right now. Credit card companies will let you stop any future purchases on a card so you can focus on paying what you already owe; you just have to call them and ask.
With the card essentially frozen, you can wean yourself off of spending more on it, while paying it off every month. Tap or click here to learn how to freeze your credit. So this is a great option for those with spending issues as well.
Once the card is fully paid off, interest and all, you can contact your credit card company again to redeem any outstanding rewards. You don’t want to lose those after working so hard to pay off a card!
Then you can call or write a letter to your credit card company to cancel the account. You’ll finally get rid of a card you don’t want, and your credit score won’t be completely destroyed in the process.
This is really why you can’t just cut up a card and stop using it — debt from a card will haunt your score forever. Take care of it before you cancel so your credit stays healthy, even as you lower your limit.
5. How often do you use a card?
Overspending and accumulating credit card debt is the best reason to start limiting the number of credit cards you have. You never using certain cards is the next best reason.
This connects back to paying annual fees for rewards you don’t use. If you have a credit card but never make purchases with it, unless it’s seriously helping your credit utilization rate, it’s probably just costing you money.
So it’s worth paying off what you have spent on the card, redeeming what rewards you have, and calling your card issuer to close your account. You’ll then get a formal letter about the closing, and then you can cut the card up.
You’ll mess with your credit limit to debt ratio closing it. But if a card isn’t helping you, it may end up hurting you. Tap or click here to protect yourself from credit card fraud.
So, cancel a credit card if you think it’ll help you in the long run. Just consider the 5 things we mentioned above before you do it, so you do the least damage to your credit score and credit utilization rate in the process.