Should You Close Your Credit Cards?
July 4, 2013
Many have discusses whether you should close credit card accounts or keep them open. The answer to this question all depends on your financial goals. If you’re working with a program, such as Dave Ramsey’s Financial Peace program and you’re trying to eliminate all your debt, it makes sense to close your credit card accounts. However, this isn’t the case for everybody and sometimes it’s a bad idea to close credit card accounts.
You’ve probably heard the myth, “if you close your old credit card accounts, your scores will drop.” This isn’t exactly true for every situation. You can safely close an old account without any drop in your credit score, but it has to be done right. Those with many cards or those not carrying much debt won’t see much change when they close a credit card account.
However, if you only have one or two cards, you carry maxed out cards or you have high balances, closing a credit card account will cause an issue with your debt to limit percentage, which will cause your score to drop. The debt to limit part of your credit score makes up a large percentage of your score. Simply put, it’s the difference between your credit card balances and the limits on your cards.
It’s recommended that you never carry a balance over 25% of the credit limit because it will hurt your credit score. In this case, if you’re already over this percentage and you close a card with a zero balance, it will make your score in this area worse.
If you close a card with a very low limit or you’re closing a card because you opened a new one with a similar limit, you won’t see much of a change in your score. However, if you close one with a high limit, you are at risk of your score dropping. It might benefit you to keep the card open and just use it for a few small purchases each month, while paying it off in full each time you get a bill.