If you’re trying to cut spending and manage your bills, paying off a credit card and closing the account can seem like a good idea. Even though this plan makes sense in some ways, it isn’t always the best plan, and you may find yourself wishing you hadn’t canceled your account after all. Depending on the situation and the creditor, you may be able to reopen your account, but it’s not always possible.
Impact on Your Credit
People often decide to pay off and close a credit card account in an attempt to improve their credit. While this may seem like a reasonable thing to do, it can actually backfire and cause a drop in your credit score. One reason your score drops is that your FICO credit score evaluates how much money you owe in relation to your available credit. Closing an account reduces your available credit, often to the detriment of your score. It also impacts the overall longevity of your credit card accounts, another cause of a falling score.
How to Reopen an Account
In many cases, you’re likely to find that the credit card company is not interested in reopening your account, especially if it has been a long time since you closed it. ]Even if you think it’s been too long, Dr. Don Taylor at Bankrate.com, a consumer financial advisory website, suggests that you should go ahead and ask the company to reopen the account; the worst that will happen is that it may say no. If the company turns you down, your best bet is likely to be opening a new account with the company and starting over.
The Downside of Closing Accounts
Besides the possible impact on your credit score, closing your credit card account removes a potential source of emergency funding. Having a usable credit card with a zero balance could be very helpful if you find yourself faced with a sudden financial emergency such as the loss of a job or some other urgent situation. Just because you have it doesn’t mean you have to use it, but if you don’t have enough credit and you find that you need it, you will regret closing the account.
An open account with a zero balance can boost your credit score by reducing your debt-to-credit ratio, and a card you’ve held for a long time is also beneficial. Instead of closing accounts that you’ve paid off or that you seldom use, consider just leaving them open. If the accounts remain inactive for a long period, the credit card company may close them, but if you use them sparingly and pay them off the same month you use them, you’ll reap the benefits of having these cards and none of the penalties.
- MyFICO: How to Repair Your Credit and Improve Your FICO Credit Score
- Stars and Stripes Money Talk: Credit Card Accounts are Difficult to Reopen
- Bankrate: Closing Inactive Accounts
- Clark Howard: Cycling Your Unused Credit Cards Back Into the Mix
- Bankrate: Reopening an Old Account to Improve Credit
- Bank of America: The Advantages of Credit Cards
- myFICO. "Will Closing a Credit Card Help My Credit Score?" Accessed Nov. 30, 2019.
- Legal Information Institute. “15 U.S. Code § 1681c. Requirements Relating to Information Contained in Consumer Reports.” Accessed Nov. 30, 2019.
- Experian. “When Are Closed Accounts Deleted?” Accessed Nov. 30, 2019.
- Experian. “What is a Credit Utilization Rate?” Accessed Nov. 30, 2019.
- myFICO. "Credit Mix." Accessed Nov. 30, 2019.