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Everything comes and goes. We buy a car, only to then sell it or trade it in a few years later. We buy a new phone, then sell it when it gets old and has outlived its usefulness. The same seems to apply to credit cards. We open a credit card account, then close it when we realize that particular card offers us no benefit. Or, more often than not unfortunately, we rack up thousands of dollars on it and after we manage to pay it off, we close the account out of fear of temptation. Obviously, if you fall into the latter category, you should not yet be concerned with collecting points, but rather with developing self-discipline and resisting temptation. Refer to this article if you need to pay down credit card debt.
There are a couple of things we can do before closing a credit card account or even in lieu of closing it altogether. Closing an account has a tremendous impact on our credit score so it should always be our last option.
Opening a Credit Card Account
Before we can understand what happens when we close a credit card account, we have to know what happens when we open one. The main thing to be aware of is that our credit system in the US is very complex and there are a lot of things to consider. Opening a credit card account is both good and bad for our overall credit score. It’s bad because the initial credit check is viewed negatively by the credit bureaus. The new credit card account further hurts us by lowering the average age of our accounts. But if we then use our new card responsibly and stay below 10 percent credit utilization, our credit score will go up again and probably even surpass the previous level.
That new credit inquiry really only causes a minor dent to our score. The age of our accounts, however, plays a much larger role. Fortunately, all we have to do for this to improve is, quite literally, wait. The most important factor is our new credit limit. When I say it’s important to remain below 10 percent credit utilization, I’m referring to both, the individual accounts and all of our accounts combined. Credit utilization plays a vital role in our credit score, so when we open that new account, our overall credit utilization automatically drops due to the new credit limit. Charge cards, like the American Express Platinum card, are exempt from this rule because they do not have an actual credit limit. So overall, the pros far outweigh the cons when it comes to opening a new credit card account.
Closing a Credit Card Account
Our credit score takes a hit on several fronts when we close a credit card account. Not only does the average age of our accounts drop, but our credit utilization automatically rises because we now have less credit to play with. Granted, closed accounts remain on our credit report for up to a few year after we close them, but eventually they will disappear. There really is no positive to closing a credit card account and it should be, therefore, avoided at all cost. Definitely do not close the account if the card has no annual fee. Just use the card every two or three months and then pay it off immediately. Better yet, turn on Auto-Pay and have the bank do it automatically. If the card has an annual fee that is no longer feasible, there is a sequence of events, or escalation of force if you will, that should be followed:
- Call your bank and ask if you can have the annual fee waived. Customer care reps usually have that authority. Your SCRA benefits could come in handy in this case. Do not close the account if this works.
- Call the bank and request a Product Change to an annual fee free version of the card. Do not close the account if there is one available and this works.
- Call the bank and ask to have the credit limit transferred to another account. This only works if you have multiple credit card accounts with that financial institution. Doing this helps minimize the effect of closing the account. You’ve tried everything now and are prepared; go ahead and close the account.
The first step is one of those “it never hurts to ask” deals. If the customer care representative is nice enough, or just has a good day I guess, he or she may just grant you your wish. Or maybe just for no other reason than to keep you as a customer. Just remember that you’ll have to repeat that phone call next year again. This strategy really only makes sense if you suspect that the card could become useful to you again in the future. Step number two is a more permanent solution. A lot of credit cards have an annual fee free version. Even if there isn’t one, there may be an unrelated annual fee free card with that bank that you’re interested in. If that’s the case, and you’re able to perform a Product Change to that card, that’s a double win for you. If neither of these steps work and you have another credit card account with that bank, just ask to have the credit limit transferred and then close the account. You may not be able to transfer all of it, but doing this limits the effect the account closure has on your credit score, because your credit utilization remains largely unaltered.
Do not just close your credit card accounts simply because you grew tired of them. This is especially true for your older accounts, as those add significant maturity to all of your accounts combined. Credit cards give you tremendous control over your credit score. Hold onto them for as long as possible and talk to your bank if the annual fee is no longer feasible. Even if they can’t help with the annual fee, at least they’ll be able to help you minimize the effect the account closure has on your credit.
Have you ever closed a credit card account and then later regretted it? Comment below or on our social media pages.