Guest Post

3 Reasons Why Closing Your Credit Card Is a Mistake When You’re In Debt

3 Reasons Why Closing Your Credit Card Is a Mistake When You’re In Debt

It can be tempting to close a troublesome credit card. Whether you have just paid off its balance or are still drowning in debt, you may have vowed to never use it again.

Unfortunately, this strategy might not be within your best interest. Many times, keeping an old card open even if you are not using it can actually be beneficial to your credit.

Here are the top three reasons why, along with what happens when you stop using your credit cards.

1.   Debt utilization ratio

Your debt utilization ratio can play a role in your ability to get loans or other new lines of credit. Put simply, a debt utilization ratio is how much of your overall credit limit you use on a monthly basis. For example, if you have one credit card with a limit of 1,000 dollars and you routinely spend 500 dollars a month with that card, then you have a utilization ratio of 50 percent.

Note that this number is calculated using your overall credit. This means that if you have two cards with 500 dollar limits and you max out one each month without touching the other, your ratio is still 50 percent.

Many people forget to factor their debt utilization ratio into their budget and can be in for a surprise when they are turned down for a mortgage or end up with high interest rates. Most lenders favor people whose ratio stays below 30 percent. Usually, this number is taken at average, so one month here or there where you went above that 30 percent isn’t the end of the world. Nevertheless, you should make it a goal to make this a habit. Maxing out your credit is also something to avoid, as it makes lenders very nervous about your ability to make good on your debts.

Sometimes this problem can be avoided by a phone call to your credit card company. If you have two cards from the same lender, they may be willing to let you close one card and transfer its balance to your other card, thereby keeping the same maximum credit amount.

2.   Payment history

Most people close credit cards after the interest rates become too high, usually after an introductory rate has worn off. If you’ve been using your card for two years to take advantage of the advertised 0% APR, consider keeping the card open even after the rates skyrocket at the end of that promotional period. This is because closing a card closes that line of credit. As a result, all those months where you were making payments on time might not count towards your credit score.

Lenders love long, consistent credit histories. Closing an account puts a countdown on that line of credit, and after 10 years it will disappear entirely.

3.   Variety’s the spice

Something else that lenders really like is variety. The more lines of credit, the better! There is a limit to this, of course, as having something like two dozen credit cards would be very suspicious. In general, though, lenders like to see more than one or two credit accounts. After all, they make money off your ability to go into debt and pay it back on a regular basis, so they’ll want to see that you’re both willing and able to balance a few different lines of credit.

What happens when you stop using a card?

We’ve just laid out the reasons for keeping card accounts open even if you don’t need or want to use them, but beware that this does come with a few considerations. First and foremost, an open credit card account is still vulnerable to fraudulent activity even if you aren’t using it. So just because you’ve stopped using a card doesn’t mean you should forget all about it. Be sure to continue viewing your balance statements or checking your online payments to make sure no one has nicked your card number.

Secondly, annual fees or other account charges may still apply to cards you aren’t using. So don’t forget to check in with this information before you decide to keep a card open.

Finally, be aware that the credit card company may not be pleased with your inactivity. After all, they don’t make money if you don’t use the card. Some lenders will close cards on their own if you aren’t using them. While lenders are certainly in no hurry to close credit card accounts, they may choose to do so if your account remains inactive for a long period of time. There is no rule or industry standard for how long an account can go unused before the line of credit is closed by the lender. It is up to each company to decide. So it may be worth it to use your card at least a few times a year for something small like gasoline or groceries, just to keep the account active.

This is a guest post by Christine Yaged. Sheis a co-founding partner and Chief Product Officer of FinanceBuzz. Christine launches and scales brands. She is passionate about technology, digital marketing, and people.

Next article The New Definition of Thoughtfulness (According to Millennials)
Previous article Learn to Utilize Your Brain in the Trading Profession

Related posts


No Comments Yet!

You can be first to comment this post!

Leave a Comment