If you’ve arrived at this post from a web search, there’s a good chance you’re already looking to close a credit card and need some validation, so hopefully, this list can provide that.
The story starts with my own experience as I’m looking to close a credit card right now.
Before we get started, let’s review the primary reason that you shouldn’t close a credit card account — because it can negatively affect your credit score. As illustrated by the wonderful Credit Karma here, your credit score is made up of six items — three of which are affected by closing a credit card account, as follows:
- Payment history
- Credit card utilization (lower is better): Your utilization is the fraction of the total amount you currently owe divided by the total credit you have available across your cards. Close a card and your utilization goes up when the denominator of this fraction decreases (To understand this, remember that a 1/4-pound burger is smaller than a 1/3-pound burger)
- Age of credit history (older is better): Over time, closing an account could also decrease the average age of all of your credit card accounts
- Credit inquiries
- Total accounts (more is better): Should be self-explanatory why closing an account makes this number smaller
- Derogatory marks
If you’ve got otherwise solid credit, it’s likely that closing one credit card account won’t hurt your credit score much, if at all.
Still, that’s hardly an argument for closing an account. It may be tough to think up many benefits of closing a card that wouldn’t be similarly achieved by paying off the entire balance and simply shredding the card or making it otherwise unusable to you.
Still, I came up with a few which I explain here.
You’ll be charged an annual fee
This is a great reason to close a credit card account.
It’s why I’m closing mine! The annual fee was waived that first year and I got a fantastic sign-up bonus.
But keeping it open after that first year? No thanks. There are just too many solid alternatives out there that don’t charge an annual fee.
You’re afraid of fraud
Well, this is totally sensible. After all, the fewer accounts you have, the fewer opportunities thieves will have to steal your account information.
There are some steps you can take to minimize the chance of fraud before closing a credit card account:
- Opt out of paper statements so thieves can’t pluck your information out of your mailbox
- Ask your credit card company to not send you balance transfer checks in the mail (If they keep sending them, ask that your cash advance limit be dropped down to $0)
- Practice good password discipline
- Check your transaction history frequently so that you can spot and report charges you don’t recognize as soon as they happen
Sure, there are plenty of practical, technical reasons why you shouldn’t close credit cards, but we’re humans; not robots! If closing your credit card makes you feel better, the potential drop in your credit score shouldn’t stop you from doing so.
Ambiguity of personal finance
I’ve said it before and I’ll say it again — personal finance is personal. I can only begin to imagine all the reasons that people might come up with for wanting to close a credit card given all the complex aspects of personal finance out there. And really, if you want to close a credit card account, you should just do it. Personal finance is personal.
And that’s that! What are some of the other reasons you can think of to close a credit card account rather than just paying it off and shredding it?