There is more to it than Simple Closure

Professional advice has always warned against closing existing credit accounts. Your credit score is made up of a number of elements one of which is your existing debt relative to the credit that you still have available. You should ideally never exceed 30% of debt against your total available credit. If you zero an account then close it you will be reducing your available credit and therefore potentially harm your score.

You should certainly get rid of expensive credit card balances and can do that with a far more competitive personal loans. Modern online lenders provide a simple and speedy loan vice with approvals dependent far more on affordability rather than the previous history of the applicant.  Decisions are usually fairly immediate with correct applications and the money transferred automatically within the next working day. You will not face another interest rate charge on your card.

The question is whether you should retain the card. As long as you are self-disciplined in the future and only use the card for convenience then why not? You should be certain you can pay off your month’s spending in full at the end of the accounting period in order to avoid interest being applied.

The Scissors

There are occasions when taking scissors to you card makes sense:

  • Self-discipline can be a problem. You may be tempted by some special offer or the latest gadget. How strong is the will power? If you close an account then you cannot spend anything on it. Credit scores do judge accounts of some age higher than new ones and overall 15% of your credit score is made up of the length of your credit history. That is not affected if you close an account and removal of temptation may be worth the slight setback to your short term score. Your good history relating to the card will not disappear until the seven year limit removes it anyway.
  • If your card has a particularly high rate of interest or stringent terms and conditions it may well be worth closing it and getting a more competitive card. That will mean you retain your debt/available credit ratio. If you can negotiate the waiver of fees then by all means keep the card.
  • If your card is ever used fraudulently it makes sense to close the account. If it has been used once it may be vulnerable for unauthorized used again even though the first transaction was identified.
  • If the card is a joint account and you are splitting up it is obvious that the account should be closed.
  • At times a card is useful because of the rewards and promotions that have been a regular feature. If they no longer apply then it may not make sense to keep the card, especially if another card provides what you now need.
  • Where you have resolved never to seek credit again then more than a single card for convenience makes little sense. Your mortgage may already be in place so why have multiple cards when you are handing your payments well? That should ensure your credit score is fairly good.

If you get the scissors out then it is worth taking a couple of other steps at the same time:

  • You must keep your debt levels low. If your debt ration changes and harms your credit score if you reduce your debt you can restore your score without taking on a new card.
  • Where you have a choice of which card to close, close the newest one unless its terms and conditions are clearly better than an older card.

Ultimately anything older than seven years disappears from your credit history but by the time that happens with the positive entries on an account you have closed you can take  other prudent steps to improve your credit score elsewhere. That not only means reducing your overall debt but continuing to pay all your bills on time from personal loans to regular monthly commitments like utility bills or insurance payments.

If your financial management skills improve you need not worry too much about closing any account because you will find that your credit score will start to reflect your better performance when it comes to your financial affairs.

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Comments

  1. Good post. A lot good points to consider.

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