Pros & Cons of Closing Credit Card Accounts

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Credit cards are notorious for high interest rates, which makes them costly if you don't pay off your full balance in full each month. And lenders can set low minimum balances on monthly card payments, allowing them to milk as much interest out of you as possible unless you make larger payments. Closing a credit card account eliminates the chances of falling victim to such debt pitfalls, but it also can have some negative consequences.

Controlling Spending

Credit cards can be dangerous if you are an impulsive shopper. A single shopping spree could result in a balance that takes years to pay off if you make only the minimum monthly payments. Closing a credit account eliminates the temptation to use your card to buy things that you don't need or can't afford. In the case of joint credit cards, you're liable for the entire balance even if you didn't accrue the debt. Canceling a joint account ensures you won't end up having to pay for someone else's spending.

Avoiding Interest and Fees

Credit card companies make money in part by charging interest on balances. They also hit you with fees for late payments, cash advances, foreign transactions and other services. All of these costs can make it much more expensive to pay with credit than with cash or checks. Closing a credit card means you won't have to worry about paying interest on it or getting slapped with card-related fees.

Credit Impact

Letting an old credit account sit around unused might seem like a bad idea, but closing a credit card can hurt your credit score. Your credit score is based on a variety of details related to your debt balances and credit history, including a number known as your "credit utilization ratio." This ratio is your total credit balance divided by your total available credit. Closing an old account that has little or no balance can increase your credit utilization ratio, which might lower your credit score.

Available Credit

Keeping an old credit card account around can be worthwhile simply in case you need it. Even if you never plan on using an old account, you might require extra cash during a financial emergency. Having access to an old credit account also gives you backup if you can't use your main account for some reason. For instance, if you're traveling and your primary credit account is frozen because of suspicious activity, you can fall back on your old account.