Credit cards are a slippery slope for many people. It’s important to have one for emergencies, online booking and to build credit. But credit can also seem like “free money” at times, making it all too easy to rack up debt you might not be able to easily pay off. If you find yourself in a position where you think you should close your credit card, however, you’ll want to hear why experts suggest you think twice first.
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See: 5 Reasons Why You Need a Credit Card
Closing Affects Your Credit Utilization Ratio
You have probably heard about how credit affects your credit score, but you might not be as familiar with the concept of a credit utilization ratio, which is calculated so that your current debt is represented as a percentage of your total available credit, said Baruch Silvermann, CEO and founder of The Smart Investor, a free financial academy. “If you have a total credit limit of $10,000 across all your credit cards and loans, and total account balances of $3,000, your credit utilization ratio is 30%. Generally speaking, it is a good idea to keep your credit utilization ratio below 30%.”
See: Why It’s Still Better To Use Your Credit Card Over Your Debit Card
Closing a card can affect this ratio and drop you below that golden number, making potential lenders less likely to lend to you.
If you close a credit card with a high credit limit and keep open a card that has already been heavily utilized, your available credit also goes down, said Giovanni Braghieri, CEO and co-founder of My Consulting Coach. “Consequently your credit utilization goes up.”
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Closing Can Negatively Affect Your Credit Score and Credit History
One of the great paradoxes of credit is that in order to build a credit score, you have to have various forms of credit to show for yourself, even if you’re someone who doesn’t like to carry debt. Paying off your debts quickly and reliably builds your credit score, which is necessary for things such as taking out loans for homes, cars and other items. If you close a card, you can negatively impact your credit score.
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Additionally, closing a card won’t protect against a poor credit history, warns Will Cannon, CEO of Signaturely. “The credit history on the card will remain on your credit for seven years, regardless of whether the account is open or terminated. Closing the credit card won’t solve the problem.”
“The other downside of closing credit cards, albeit a far less serious one, is a drop in your credit history,” Braghieri said. “Closing credit cards, especially older ones, will bring down your average credit history and make you look like a less experienced borrower.
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Closing Reduces Available Funds
A more basic reason not to close a credit card is having access to the funds they provide. Though you may not want to use a credit card now, having access to future funds, should you need them, is important, said Carol Tompkins, business development consultant at Accounts Portal.
You Can Close To Protect Yourself Against Fraud
However, there are times when closing a credit card does make sense, particularly if you are trying to protect yourself against fraud. “Having a card account open exposes you to fraud up to the limit on the card,” said Jon Causier, executive director of Mazars Financial Services Consulting. “If you can prove fraud–and were not careless–your bank should refund the amount affected, but this can take time and cause unnecessary hassle and worry. Closing the card eliminates this possibility.”
See: What Happens When You Get Denied for a Credit Card — And What To Do Next
You Can Close To Reduce Your Spending
If you are struggling with credit usage and want to reduce spending, closing it may be a good idea, Causier said. “If you do not trust your willpower, closing the card will guarantee that you do not spend on it and help you to keep within your means.”
Tom Thunstrom, a small-business finance writer for Fit Small Business, adds that it can be up to the individual, particularly for cards that are new or have small limits. “The impact on your credit [in those scenarios] is rather minimal and something that will fade quickly over time. If you have good credit, the hit is pretty painless…”
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You Can Close If You Have To Pay an Annual Fee That Isn’t Worth It
If you’ve got a credit card that charges an annual fee, and you rarely use it, it might be worth canceling, said Matt Weidle, business development manager at Buyer’s guide. “You should also consider canceling if your customer service is continuously terrible,” he adds. However, he does warn, “Even if you have compelling reasons, it’s a good idea to get a sense of what shutting the card will do to your credit score before you do it.”
If you are going to close a card, Weidle recommends you close your newest, lowest-limit and most fee-laden card. “If you’re canceling due to costs, you might want to phone the issuer and see if it has any fee-free cards that you qualify for.”
Additionally, you might be able to maintain your payment history by switching to another card with the same issuer, Weidle said.
Overall, think twice before closing a credit card; you can always cut up the card and simply not use it, while leaving the account open.
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Last updated: Oct. 8, 2021
This article originally appeared on GOBankingRates.com: Should You Close a Credit Card?