Should I Close My Credit Card After Paying the Balance?
While working to eliminate you debt, you are likely to see numerous people that will recommend the practice of closing a credit card account once you have paid the balance in full. However, that may not always be in your best interest.
Often times people will think that once an account has been paid off, closing the account will improve their credit score and help them along in the process of eliminating their debt. Unfortunately, when you close the credit card after paying the balance, you will most likely see your credit score drop.
Two of the more important factors in determining your credit score are the amounts owed across your accounts and the length of credit history. When you close an account, there is the potential for a negative impact on both of these factors.
First, closing the credit card will damage your debt to available credit ratio. Consider the following example: you have three credit cards, each with a credit limit of $5000. Two of the cards have a balance of $3500 and the third card has a balance of $1000, for a debt to available credit ratio of approximately 53% ($8000 total balance with $15,000 in available credit). Assume you are able to pay off the account with the $1000 balance and immediately close that account. All of a sudden your debt to available credit ratio has jumped to 70%, as you now have a total balance of $7000 but your available credit has been reduced to $10,000.
Second, your length of credit history will be impacted when you close your account as the average age of open accounts will likely decrease. Since the length of credit history is one of the more important aspects of your credit score, it is usually in your best interest to keep your older accounts open.
As an added bonus, keeping the credit card account open will likely provide opportunities for attractive balance transfer offers. Once the credit card has been paid, you will likely begin to receive offers to transfer other higher rate debts to that card. As mentioned in a previous article, low-rate balance transfers can be used to your advantage to save you thousands of dollars in finance charges.
At this point, you may be wondering if there are any situations where it still makes sense to close the credit card. It may be in your best interest to go ahead and close the credit card if the credit card charges you an annual fee. However, before closing the account, use the strategy similar to calling the credit card company to reduce your interest rates and call the credit card and request that the annual fee be waived or inquire if they can switch you to an account that does not carry an annual fee.
Another situation where it may make sense to close the credit card is when you are still struggling with the temptation of using the credit cards for purchases. If you have not been able to correct any bad habits that may have landed you in credit card debt, you may have more benefit by removing the temptation of the increased available credit.
While there are instances, as mentioned above, where it may make sense for you to close your credit card account after paying the balance, most people will benefit more by keeping the account open. The important thing is to educate yourself on your options and the impact that each option may have on your overall debt elimination strategy.
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