As a savvy traveler and mindful financial planner, you’re likely well aware of the importance of managing your credit cards wisely. They’re not just convenient tools for making purchases; they also play a significant role in shaping your financial health. You all know I use credit card points to help me travel the world for free!
Remember, though, credit cards aren’t supposed to be taken lightly. One common dilemma many face, and a question I’m often asked, is “should I close my credit card once I’m done using it?” (ie, you got the sign up bonus, used your points for an awesome trip, and now it doesn’t benefit you any more). In this guide, we’ll dive into the depths of this decision, exploring the reasons for and against closing a credit card, its impact on your credit score, alternative options, and more.
Understanding the Dynamics
Why You Might Want to Close a Credit Card:
- Reducing Temptation: If you have multiple credit cards and find it challenging to resist the urge to overspend, closing one or more cards can help curb this temptation.
- Avoiding Fees: Some credit cards come with annual fees. If you’re not utilizing the benefits of a particular card enough to justify the fee, closing it can save you money.
- Simplifying Finances: Managing multiple credit cards can be cumbersome. Closing accounts can streamline your financial portfolio and make it easier to track your spending and payments.
- Security Concerns: If you’ve experienced fraudulent activity or security breaches on a particular credit card, closing it can provide peace of mind and prevent further unauthorized charges.
Why You Might Want to Keep a Credit Card Open:
- Impact on Your Credit Score: Closing a credit card will negatively impact your credit score. Continue reading below for more information on this point!
- Loss of Rewards or Benefits: If the credit card offers valuable rewards, such as cashback, travel points, or airline miles, closing the account means forfeiting these benefits. Consider whether the rewards outweigh the costs of keeping the card open.
- Potential Impact on Future Credit Applications: Closing a credit card may affect your ability to qualify for new credit in the future, especially if you rely on your credit score for major purchases or financial opportunities.
Assessing the Impact on Your Credit Score
It’s essential to understand how closing a credit card can affect your credit score, as this often weighs heavily in the decision-making process. Here are some key points to consider:
- Credit Utilization: Your credit utilization ratio is the amount of credit you’re currently using compared to your total available credit. A lower ratio is generally better for your credit score. Closing a credit card reduces your available credit, potentially increasing your utilization ratio if you carry balances on other cards.
- Length of Credit History: The length of your credit history accounts for 15% of your FICO credit score. Closing a longstanding credit card can shorten your credit history, which may have a negative impact, particularly if it’s one of your oldest accounts.
- Credit Mix: Having a diverse mix of credit types, including credit cards, installment loans, and mortgages, can positively influence your credit score. Closing a credit card may reduce this diversity.
- New Credit Inquiries: If you’re planning to apply for new credit soon, keep in mind that closing a credit card will decrease your total available credit, potentially affecting your debt-to-income ratio and creditworthiness in the eyes of lenders.
Exploring Alternative Options
If you’re hesitant to close a credit card but still want to minimize its impact on your finances, consider these alternative strategies:
- Downgrade to a No-Fee Card: Many credit card issuers allow you to downgrade to a no-fee version of your card, preserving your credit history while eliminating annual fees. This is my personal go-to option! Just phone the number on the back of the card.
- Negotiate with the Issuer: Contact your credit card issuer and inquire about waiving or reducing annual fees, lowering interest rates, or negotiating better rewards. They may offer incentives to encourage you to keep the account open.
- Use the Card Sparingly: Even if you’re not actively using a credit card, making occasional small purchases and paying them off in full can help keep the account active and prevent it from being closed due to inactivity.
- Keep the Account Open but Locked: If security is a concern, consider keeping the credit card account open but placing a temporary freeze or lock on it to prevent unauthorized use.
Mitigating the Impact on Your Credit Score
Should you choose to close a credit card, to minimize the negative effects of closing a credit card on your credit score, consider implementing the following strategies:
- Pay Off Balances: Before closing a credit card, make sure to pay off any outstanding balances. This not only improves your credit utilization ratio but also reduces the risk of accruing additional interest charges.
- Monitor Your Credit Report: Regularly check your credit report for inaccuracies or unauthorized accounts. Dispute any errors promptly to prevent them from negatively impacting your credit score.
- Space Out Account Closures: If you have multiple credit cards you’re considering closing, space out the closures over time rather than closing them all at once. This can help mitigate the sudden decrease in available credit and minimize the impact on your credit score.
- Keep Older Accounts Open: If possible, prioritize keeping your oldest credit accounts open, as they contribute positively to your credit history and overall score.
Exploring Long-Term Financial Goals
When deciding whether to close a credit card, it’s essential to consider your long-term financial goals and how various actions align with them. Reflect on questions such as:
- Are you planning to apply for a mortgage or other significant loan in the near future?
- Do you anticipate needing access to additional credit for upcoming expenses or investments?
- Are you comfortable managing multiple credit accounts, or would consolidating be more conducive to your financial well-being?
By envisioning where you want to be financially in the years to come, you can make more informed decisions about managing your credit cards and overall financial portfolio.
Seeking Professional Guidance
If you’re still uncertain about whether to close a credit card or how it may impact your financial situation, consider seeking guidance from a qualified financial advisor. An advisor can provide personalized insights based on your unique circumstances, helping you navigate complex financial decisions with confidence.
Making an Informed Decision
Ultimately, the decision to close a credit card should be based on your individual financial situation, goals, and priorities. Before taking any action, carefully weigh the pros and cons, considering the potential impact on your credit score, financial flexibility, and overall financial well-being. If you’re unsure, seek guidance from a trusted financial advisor who can provide personalized advice tailored to your circumstances.
By approaching this decision thoughtfully and understanding the implications, you can make the choice that best aligns with your long-term financial goals while continuing to enjoy the perks and benefits of responsible credit card use. Happy travels and smart financial management!
Make sure to read about the basics of credit card hacking for travel and whether or not opening credit cards hurts your credit score for more awesome tips!
