Should You Close Old Credit Accounts?
Closing a credit account might sound like ripping off a Band-Aid: sweet release. But it's not always that cut and dry. While it sometimes makes sense to close an account, it's not something you should do without considering some potential consequences.
The Potential Benefits of Keeping Accounts Open
There are a few reasons why you might want to think twice before going through with closing a credit account. These are some of the top things you should consider:
- Having the account open doesn't hurt you. There's nothing working against you by simply having an open credit account. If you're someone who can't keep themselves from maxing out cards if you have them, that's another situation. But there's usually no harm in just having an open account, even if you're not really using it.
- More open accounts mean your credit utilization ratio will likely be lower, which looks good to creditors. While there's not anything inherently wrong with having an open account and not using it, you might regret closing one or more if it significantly lowers your total available credit. Credit reporting agencies look at your overall credit utilization ratio (how much credit you're using versus how much you're allowed) when determining your credit score. You typically don't want to be using more than 30 percent of your credit limit at any given time. Closing cards will lower your credit limit, and thus raise your credit utilization ratio.
- You may unintentionally shorten your credit history when you close accounts. Your credit report is heavily influenced by your payment history. If you erase part of that history, it could come back to bite you once that's removed from your credit report.
It might not seem like such a big deal to close a credit account. But there can actually be some unintended consequences when you do this. Make sure you're not going to be worse off for any of these aforementioned reasons if you do go forward with closing an account. There are some further things you should also think about before making any decisions.
Closing Accounts Won't Erase Your Balance
Some people might be under the impression that closing a credit account means that it erases a debt altogether. While this can stop you from adding new purchases to an account, it's not going to eliminate what you already owe.
Think about what your motivations are before you go through with closing a credit account. If you're hoping for it to magically erase your debts, it's best to look for a different plan.
When It Makes Sense to Close Credit Accounts
There are certain situations where it does make more sense to close a credit account than leave it open. As already mentioned, it's wise for people who have a hard time limiting credit card spending to consider the potential benefits of this. It's really hard to get out of credit card debt; cutting off the source can limit the damage.
Some credit cards also levy annual fees against consumers. If you're having to pay just to keep an account open but aren't receiving a proportionate benefit from the card, it makes sense to close the account.
Sometimes people sign up for premium cards because they think the benefits will offset those upfront costs. While that's true for some people, it's not the case for everyone. It makes sense to close a credit account if you're paying for it but not getting enough reward in return.
There's a lot to think about when deciding to keep or close a credit account. It's best to consider the pros and cons before jumping to a conclusion.