Close or Keep Your Credit Card? It Depends...

05/16/2008
Understanding Credit Cards

Nearly every credit card holder sooner or later makes a decision to cancel one of his or her plastics. There can be different reasons for that. It can be an interest rate jump, a heavy credit card debt, a universal default, or just the appearance of a new more profitable offer on the market.

But, whatever the reason is, you need to remember that your every credit card closed damages your credit score. The degree of the damage can be different, depending on the credit card you cancel. If you decide to close several cards at a time, your credit score can significantly drop.

Let's consider three situations.

Closing a New Credit Card

So, you have received a new card deal by mail. The card's features, options and terms seem to be so enticing and beneficial. Besides, it has already been pre-approved. You do not need to surf the web or rummage through piles of credit card offers in the search of a new plastic for you. And this no fee credit card (or a low rate card, the one with rewards points, etc.) seems to be just what you need at the moment. And you, without thinking twice, just sign up for the card.

Soon after you activate it you discover that the 0% into APR is applied only to balance transfer (while you needed an interest-free period for purchases), or there is an earning cap for miles (you do not want that), or any other pitfall that you could find only in the fine print (which you ignored to read).

So, what do you do? The card turned out to be not what you expected and you want to close the account. Will it hurt your credit score?

Any financial expert will tell you that not a slightest move concerning your credit card management will escape credit bureaus attention. But the devil is not so black as he is painted. Closing a new credit card will not damage your credit score severely.

Closing an Old Credit Card

Canceling old credit cards, however, affects your score inevitably. When you close a plastic you have been using for a long period of time, you erase a part of your credit history. And it does not really matter if it was good or bad credit history. The longer you have had your credit account - the more your credit score suffers when you close the card.

Closing a Non-Activated Credit Card

If you want to cancel a credit card you have never used, you will not be able to actually cancel it. You can cancel only an activated card. But it does not mean that you will have to activate the plastic first, make some purchases with it, pay off the balance and only then you can close it. No. You can just call your credit card company and ask them to close your account.

However, do not rush to opt out. Financial experts advise to activate such cards and keep them as an emergency fund. If it comes with no annual fee, you can keep the card. With a 0 balance on it, it will not require any money spending. But it will pay dividends to your credit history. But if you have to pay an annual fee, and if you find some tricky features or hidden fees on the card, you should better close the account.

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Comments

Julia, 05:59 AM, May 26, 2008
I usualy keep my old credit cards. I just pay down the balance and if I don't need the card any more, I put it aside, keep paying for its maintenace and it pays dividends to my credit.

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