You are reading Week 43 of 52 Weeks to Eliminate Debt & Curb Spending. Please read the overview here to learn more about the series & get your FREE financial planner. If you just joined us, please start with week 1.
As you are getting closer to paying off your debts, Knowing When To Close Credit Accounts is important. There are a few factors to consider once a debt is paid in full. This week we want to focus on making the best choices with your accounts that are now resolved or paid off.
Do you have a large number of credit accounts open? Sometimes when you are paying off debt you realize that you have an unusually large number of credit card accounts. When you have more than 10 credit card accounts, you may want to evaluate as they are paid off and close some accounts. Accounts in good standing can help your credit score, but an account that had many dings can be closed and will only be removed that much faster from your overall credit score.
Do you no longer have access to the store the card was issued from? Sometimes we get those specific department store cards because they offer a great discounts on signing up. Who wouldn’t love a little extra time to pay off a debt? The card from the jewelry store you bought your wedding rings from is something you don’t need to use again. Closing that account will make sense in your overall financial plan.
Is the interest rate significantly higher than other credit accounts? If you have an option of using an account with a much lower interest rate to maintain and build your credit, close the higher interest account and focus on paying off other existing debt. When you feel comfortable using credit again, you can then use the account you chose with lower interest rates instead. It’s also wise to pick cards to close that have an annual fee vs cards that don’t make you pay each year just to use the card.
When deciding whether or not to close credit card accounts, think about how it could negatively affect your credit. If you’re going to make a large purchase soon, closing accounts now might not be a good option. It’s also wise to keep some cards open with a zero balance and use them occasionally. It looks good on your credit report to have active accounts in good standing.
As you navigate your way toward being debt free, knowing when to close credit accounts will come in handy. Ideally you want to pay off your debt in a reasonable manner so your credit account will be in good standing, but sometimes closing an account just makes sense for your overall big picture credit and debt plan.
Week 43 Challenge:
Evaluate all your current credit cards. Research your specific cards and determine if closing some accounts is the best option.
Resources:
- The Do’s and Don’t of Closing Credit Cards from US News.
Note from Tori regarding closing accounts:
Speaking from experience use caution when closing accounts. If you close older accounts, it will appear that all of your credit cards were opened recently (less years of credit history – bad thing). If you close accounts that have a positive reporting history, they will drop off your credit history in 10 years . At that point, they will not longer be contributing positive information and it will also shorten the length of your credit history (bad thing). If you close accounts, it will lessen the overall credit that is available to you which means you have a higher percentage of credit having been used (utilization). (Such as you have a $8,000 cc and a $2,000 cc. You normally have about a $1,000 in cc debt so are using about 10% of your available credit. If you close the $8,000 cc, continue to have $1,000 of credit being used, you now are using 50% of your available credit. Bad thing.) Closing accounts seems like it would be a good thing but, it can actually harm your credit.
Disclosure: I am not a financial adviser nor do I have formal financial training. All articles are for informational purposes only and should not be interpreted as financial advice or consultation. Please consult your account and/or financial adviser before making changes to your finances. All situations are different, so please consult a professional to determine your individual needs.
Speaking from experience use caution when closing accounts. If you close older accounts, it will appear that all of your credit cards were opened recently (less years of credit history – bad thing). If you close accounts that have a positive reporting history, they will drop off your credit history in 10 years . At that point, they will not longer be contributing positive information and it will also shorten the length of your credit history (bad thing). If you close accounts, it will lessen the overall credit that is available to you which means you have a higher percentage of credit having been used (utilization). (Such as you have a $8,000 cc and a $2,000 cc. You normally have about a $1,000 in cc debt so are using about 10% of your available credit. If you close the $8,000 cc, continue to have $1,000 of credit being used, you now are using 50% of your available credit. Bad thing.) Closing accounts seems like it would be a good thing but, it can actually harm your credit.