Should I Close My Credit Card?

Melissa writes in with the following question about closing credit cards:

I have an old credit card account where my charging privileges were revoked because I was having trouble making my payments.  I have since then paid off the card and it is at a zero balance.  Do I now close the account?  Would it help my credit more if I left it open?  I am trying to rebuild after years of bad credit decisions.

Deciding to close a credit card or leave it open is a tough decision. Unfortunately, it sounds like the credit card issuer beat you to the punch. Chances are they closed your account due to past due activity, which is a major blow to your credit score because it reflects that the account was closed by the issuer, rather than by you, voluntarily.

Now that the card is paid off, you might try contacting the issuer to ask if they can update the account to reflect it was closed voluntarily. They probably won’t change the account’s status, but it’s worth asking. The very fact you paid it off will help heal your credit score, as will time since the last activity (negative information should drop off your report in seven years after the last activity).

If in fact your account still reflects “Open” on your credit card, you may want to consider leaving it open to help rebuild your credit. To do so, charge something you buy every single month, and don’t have a lot of discretion in the amount spent (gasoline, or a utility bill, comes to mind). When your credit card bill arrives, pay it off promptly. This continued, responsible use of credit will help boost your credit score over time.

There is, of course, another side to this argument. Some would argue to close it and leave it closed. Don’t play with snakes. I used to feel this way myself, but since turning around my own finances over the course of a couple years, I’m now empowered by the fact that I can buy something on my credit card for purchase protections (particularly when shopping online), and simply pay it off in full later in the month. I’m in control now; not the credit card.

It sounds like you’ve made a lot of progress in your own financial turnaround, and I applaud you. Whatever you decide to do, don’t repeat those same mistakes from the past that led to problems paying your bill. The road back to responsible credit use can be a slippery slope, so if you feel yourself start to slip, put that credit card away and go back to spending cash.

Comments

  1. I haven’t used my Discover card for a few years literally. My credit is perfect and I haven’t had any late payments ever. I received a letter from Discover stating because I haven’t used the card they are closing the account. This doesn’t affect my score does it?

  2. I don’t think close. Keep the card and keep basic minimum payments on it so you can easily pay off and keep the credit score high and continuing.

  3. Does the card have an annual fee? If so, you may want to consider one that doesn’t, especially if you’re keeping it open just for the sake of building credit. It won’t help your score to close it, but nor will it damage it too much either. I like http://www.creditkarma.com/creditcards, or http://www.creditcardguide.com because they compare different cards available to people at different credit scores.
    A caveat, though: since age of accounts is also a factor in your score, you may want to weigh that against any annual fee. If you’ve had it for, say, ten years, as opposed to two, you may want to keep it open despite the fee, if there is one.
    Rebuilding credit takes time and is not easy, but it sounds like you’re on the right track. Getting started is the hardest part, now all you have to do is keep doing what you’re doing.

  4. @Rob: Potentially, since your score is based things like credit utilization (the ratio of your balances to credit limits). A canceled card lowers your avaiable credit, but because it sounds like you are credit card debt free this won’t affect you.

    The other impact it may have is to reduce the average age of your credit history. Again, I doubt it will have a significant impact.

    I suggest using a card once or twice a year to buy gas and pay it off just to keep it “active.” Issuers are purging the rolls of users who don’t use the cards and earn them merchant fees.

  5. My rule of thumb is keep account open (if there is no annual fee etc) but keep credit card unavailable to you. The credit utilization (debt to credit ratio) can effect negatively on credit score.

  6. Thanks for the good info. I should have mentioned I do have other cards with much longer history behind them and also larger lines of credit on them. There was no annual fee on the card and no non-usage fees. I guess I could have used it once a year to prevent this but hopefully I should be OK.

  7. My point of view is this, if you’re not going to need your credit for a few years (no new car loan, not refinancing) then close it, especially if you already have another card with a lower interest rate, no fees and reward points.

  8. Always, always, always keep the credit card and do not cancel the card UNLESS there is an overly onerous annual fee or you simply absolutely cannot restrain yourself to stop using the card when you do not have the bank. The reason that you do not want to close the account is that closing the account will negatively affect your credit score in at least 2 different ways: it will lower your available credit which in turn hurts your credit utilization ratios and it will remove that card off of your length of credit history. You will do well to ignore off the cuff remarks from people like “Financial Samurai” who say things like “Pls CLOSE. Anybody with more than 2 credit cards has too many.” as they are sadly misinformed.

  9. I think that you should close all credit card accounts except for one. If you just leave them open with zero balance, a good underwriter will look at your credit report and see a lot of available credit and treat it as a risk. Especially if you are buying a house. Let’s not forget that the credit score alone is not the only factor in getting a loan.

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