Ever wanted to just chuck it all and live off the grid with no attachments to society at all?
The thought to close out our credit card accounts altogether has occurred to us — especially when those bills come in each month.
However, given the way society is set up today, life is much easier with at least one credit card.
Plus, there are some significant consequences to consider when you decide to live without one.
To that end, let’s take a look at the pros and cons of closing a credit card account.
Arguments In Favor of Closing
#1 Minimizes Your Ability to Create Debt
Credit cards are all about making debt so others can profit from it. However, you can use credit cards and live a debt-free life— if you make a habit of paying your balance off in full each month before the grace period passes.
In other words, with a bit of self-discipline, you can have a credit card without going into debt. The problem is most people don’t do this, so closing the account eliminates the possibility altogether.
#2 Can Improve Your Credit Score
Closing accounts in a judicious fashion can lift your credit rating, particularly after debt consolidation.
The best ones to get rid of are the newest ones you have and those with the highest interest rates (in certain circumstances — there’ll be more on that below).
This makes the rest of them easier to pay off, which in turn will improve your score over time. It also eliminates the possibility of using them again and creating even more debt.
Just make sure the issuer reports the closing as being “at the customer’s request” so it doesn’t look like they cut you off.
Arguments Against Closing
#1 Amputates Your Credit History
One of the factors determining your credit score is the amount of experience you have managing debt.
If you have a well-managed account (always paid on time, never exceeded the limit or even got close to it) that goes back decades, creditors are going to look upon you as a favorable risk.
If you close that account, you’ll shorten the credit timeline that appears on your credit report and your score will reflect that change — usually in a negative fashion.
#2 Could Raise Your Utilization Ratio
Another of the factors lenders consider is how much credit you have available to you against the amount you’re currently using. Ideally, they want to see your utilization below 30 percent to consider you the best possible candidate for a loan.
This ratio is calculated separately across each of your accounts, as well as all of them as a whole.
If the card you kill has a very high limit and killing it makes your utilization look high, your credit score will suffer.
The Right Way to Proceed
Should you decide to close an account after weighing the above consequences, going about it strategically is critical.
Pick the card with the highest interest rate — that isn’t one of the older ones you have. Make sure closing it won’t throw your utilization ratio off balance.
If it will, choose a different account to close or wait until you’ve paid the rest of them down enough to where this won’t be an issue.
Make Sure It’s Paid in Full
Contact the issuer to get the actual payoff amount. The balance on your statement might not reflect all of the outstanding charges.
So, rather than paying the indicated balance in full and thinking you’re done, consult the issuer to find the actual payoff amount. This will save you from a potentially unpleasant surprise the following month.
Getting clear on these pros and cons of closing a credit card account before making the decision to do so is important.
You’ll preserve your credit score, make it easier to get credit in the future should you ever need it again. You’ll also avoid being blindsided with unexpected charges down the line.
Are you thinking about closing a credit card account?