Credit cards offer many advantages, including providing a measure of insurance when making purchases and enabling an individual to develop a healthy credit score through prompt payment of balances. According to a 2016 Gallup report, about three out of four adults in the United States have at least one credit card - many people have two or three.
While there is no magic figure for how many credit cards is the "right" number to have, those shiny plastic cards can have a significant impact on consumers' financial well-being. People looking to reign in spending or consolidate may make the decision to close cards, but not without wondering if closing accounts is beneficial or detrimental to their financial reputations.
The experts at Credit Karma say that there is a common belief that closing a credit card account will always negatively impact one's credit rating. But that isn't always the case. Getting the facts about when it can be advantageous to close accounts or keep them open can help consumers maintain strong financial reputations.
Utilization ratio
Financial gurus at Bankrate.com say that closing credit cards can affect the percentage of consumers' available credit, which may affect their credit ratings. Closing a particularly high-limit card will increase the percentage of used available credit when spread out across the remaining cards, also known as the utilization ratio. A higher percentage of used available credit can negative affect credit scores. Consumers who currently carry high credit card balances may be smart to keep existing lines of credit open or request increases on the credit limits of accounts they intend to keep before closing some current accounts.
Annual fees
It can be wise to close credit cards with high annual fees if the benefits of the cards are no longer proportionate to the amount spent on the fees. If cards are being held only for perks, it may be possible to find a different card that does not charge an annual fee.
Age of credit history
Discover says that if a consumer must close a credit card account, he or she should avoid closing the oldest one. The longer an account has been open, the better it is for a credit score because it establishes a long credit history. According to FICO, the length of consumers' credit histories account for 15 percent of their credit scores.
Fraud or theft
In the event a card is stolen or used fraudulently, consumers may opt to close the account so no other purchases can be made. However, creditors also work around this by keeping accounts open and simply issuing a new card number.
If the decision is made to close a credit card, do not do so while there is an available balance; all balances should be paid off before an account is closed. It's also unwise to close a credit card simply to remove poor payment history from one's record. Under the Fair Credit Reporting Act, negative data such as late payments remain on a report for up to seven years after the account is closed.
Closing a credit card account has its advantages and disadvantages. Consumers should investigate the risks before closing a given account.
