I remember when my mother first realized I owned a credit card. I was in college and the bill arrived at my parent’s house, why I didn’t have the foresight to have my bill sent to school, call it fate. As she scrolled through the charges and saw my lavish Red Lobster dinners and Journey’s shopping sprees I’m sure anger bubbled inside of her. After all, I had no job and pretty much no plan to re-pay my accumulating debt.
I didn’t have the God awful, “your card is declined” surprise at the register though. My Mom closed my card down immediately and made sure I was on the phone line to hear it because that just how she rolls.
And this is what several people move to do when they find themselves a bit over their heads or in hot water with a credit card company. They call and close the card. However if improving your credit score is your goal, it might not be to your benefit to close out the account. While closing out your account may prevent you from continuing to rack up charges on a card and possibly sabotaging your repayment plan, closing a credit card account can hurt your credit score.
According to MSN money there are five situations where it might be okay to close a credit card account:
If you are separating or getting divorced from someone with whom you share a joint account, go ahead and close it. Otherwise, as long as the account is open, you are fully responsible for any bills your soon-to-be-ex runs up. (That’s true even if your divorce decree says he or she will be responsible for that bill. Your issuer can still look to both account holders for payment as long as there is a balance.)
The Friggin fees.
If your credit card company is charging an annual fee that you don’t want to pay, ask to have it waived. The same thing is true if you are accidentally late with a payment and get hit with a late fee. (As long as you’re late only once in a blue moon, you should be able to get the fee removed.) But if your issuer won’t budge, especially on a hefty annual fee, it may be time to take your business elsewhere.
The card no longer makes sense.
For instance if you own an airlines rewards card for US Airways because their hub is located in your city, but you move to another city where another airline is the primary hub and you find yourself flying US Airways significantly less (True Story). Most airline reward cards carry hefty annual fees after the first year, so you may find it necessary to close one of these accounts and switch to a card with a more useful rewards program.
You’re done with debt.
Some people prefer to live debt free lives. And that is completely fine and I applaud you. I once worked with a woman and she and her husband only financed major purchases like homes and vehicles. Everything else was paid for in cash.While it may be best for your credit score to keep a credit card or two open and simply pay in full each month, that approach may not work for you. You know yourself. If the temptation that piece of plastic offers is too great, then get rid of it.
The card has been used fraudulently.
If your credit card has been lost or stolen, in most cases the card issuer will automatically close the account and issue you a new card. But that’s not always the case. Suppose, for example, you bought one of those diet products off the Internet, and despite your best efforts to cancel, you keep getting hit with a monthly charge for more. Or you gave a debt collector your credit card number to make a monthly payment on a debt and then discovered the collector was taking larger payments than agreed upon. In situations like that, you may want to close your account rather than risk having to fight to get charges reversed in the future.
So, according Barry Paperno, Credit.com’s community director “If a credit card is in good standing, there is a lot of positive credit history that goes with that account, which will stay on your credit report longer if you keep it open. A closed account doesn’t disappear from your credit reports. A common misconception is that once you close it, that account will no longer contribute to your credit score.”
The actual impact to your score is that you loose that amount of credit factoring into your utilization. Unless you have low balances on your other cards, closing an account can throw your debt ratio (how much credit you are using vs. what’s available) out of wack. It is recommended that you keep as many of your accounts open as possible. If you already have several old accounts, for example, and you close one, that won’t affect your score the way it would if you had only a couple.
You should also keep your oldest accounts open if you can. Scoring models take into account the age of your accounts, including the age of your oldest account, your newest account and the average age of all accounts. A seasoned credit history is best when it comes to this factor as having several new accounts will make creditors wary to lend to you and can bog down your score.
Closed accounts will eventually fall off your report and if you closed the account in good standing you will lose all of that positive history you built.
After being educated on the pros and cons of closing a credit card and you are comfortable with it potentially having a negative affect on your score I urge you to do what is best for YOUR situation.