Before you close down your credit card, you must first understand the impact that this will have on your credit. According to FICO, closing down a credit card will increase your Credit Utilization Ratio. This happens because as you close down your accounts, your total credit given goes down.
I have been tempted to to close down a couple of my unused credit cards before, After all they are just sitting there and I don’t have any need for them. One of the yearly fees on my credit card was very high, which I kept having to pay even though the card had no use. I also hated that any time I would get a credit line increase, they would always charge me a 25% fee of the increase, so if I got a $500 credit limit increase, my available credit would only be my current credit limit, plus $375.
This ended up giving me a $125 balance on a card that I hadn’t used in years, just for getting a credit line increase. I consider this a tactic that the credit card companies use in order to keep you in debt. Read the following questions that I answer which will hopefully help you stay on track and avoid paying those outrageous fees.
When is the best time to close down my credit card?
I always say that there’s never a good time to close down a credit card, as the end result is always me losing out on credit, and my credit score taking a small plunge. I have a very simple rule with my wife, where we only close down a credit card, if we have been approved for a better credit card with either a lower annual fee or lower interest rate, and at least the same amount of credit.
If you are trying to keep your credit score up, and are worrying about it going down when you close a credit card, the best thing to do is to try to get a credit card with better benefits, but with at least the same amount of credit line. This way, your new card basically replaces your old and you don’t actually take a hit on your credit utilization ratio. Once your new card has been activated, wait until the first billing cycle on your new credit card has hit, this way that new credit limit hits your credit report before your other credit limit gets wiped away.
Now if you’re just trying to get rid of it because you don’t really use it and have a zero balance on all your credit cards, then you should be safe to close it down. Since your credit utilization will be zero because all your credit cards are paid off, you won’t really take a hit on your credit score. Just be sure that your credit report lists all the correct information at lease a few months after you’ve closed it down, as sometimes you might have closed it with a zero balance, but it might say you still owed a few dollars.
Why should I close down a credit card?
If you are having trouble making the monthly payments on multiple credit cards, we suggest for you to make a very risky move for one month, and pay the entire credit card off, or at least split it into multiple large payments until the credit card is paid off, then close it down if you don’t think you’ll be able to afford the annual fees or any fees that may be associated with a credit limit increase, which is very likely to happen if you pay off your credit card and stop using it for a few months.
Another reason why you should consider closing your credit card is because you got one with better benefits, as I stated previously. This will not only cut down on the annual fees, but will also help you stay on track by reducing the amount of credit cards that you have to manage. Just make sure that you have at least the same credit limit on your new card so that you don’t take a hit on your credit score.
How long should I keep a credit card for?
A good strategy for you would be to keep the card for 6-8 months with a very low usage no greater than 8-10% of the credit limit. After 8 months, if you haven’t received a credit limit increase, ask for one. If it’s denied, then try getting a credit card with another company by applying for a card that you know will get you better benefits such as a lower interest rate, lower/no annual fee, and a higher credit limit.
If you are successful and you get a new card with better benefits, then close the other card down and repeat the same process with the new card. This will help you keep your credit utilization low, while also raising your credit score, and getting bigger credit limits! My wife and I have been able to upgrade our card 3 times using this process, but your mileage may vary as this is also highly dependent on whether you keep your credit report clean.
What happens if I don’t use my zero-balance credit card?
We always recommend that you use at least 8-10 percent of your credit limit and pay it off each month because if you don’t use your card, some credit card companies will just close your account due to inactivity. If this happens to you, this means that you will loose out on credit, and your credit score will take a small dip because your total available credit will shrink.
My wife and I usually use our zero-balance credit card to get gas, and then pay it off each month right before the new billing cycle hits. The reason for paying it off right before the billing cycle is so that the credit card company reports to the three credit bureaus that we a zero balance on our accounts. This in turn keeps our credit scores going up, and our credit utilization low.