Knowing When to Close Credit Card Accounts in Times of Debt

After incurring a significant amount of debt and successfully repaying all of your credit card balances, it can be easy to make the decision to close the accounts in order to avoid future temptation to create new debt. However, closing a credit card account may not always be the best course of action. In fact, closing an account can have variable outcomes on a person’s credit score or credit report, depending on how many accounts they already have, the status of those accounts, and the status of the account being closed. The amount of credit accounts that you have open also has an effect on the debt to credit ratio (utilization rate), as closing an account could decrease your available credit, causing your outstanding debts to become a higher percentage of your overall credit line. Knowing when to close a credit card account when trying to recover from debt can mean the difference between an incredibly slow or fast recovery.

When Closing Account Is Detrimental

It is never beneficial to close a credit account when there is still an outstanding balance, as this would cause immediate harm to the credit score. Once you’ve repaid a credit card account it is important to determine whether your current credit score will allow you to obtain approval for a card that carries more attractive terms and conditions than the card that you just repaid. Many people hastily close credit accounts after repaying them in an effort to avoid future debt, only to find they are unable to be approved for any other credit cards and therefore cannot begin rebuilding their credit as quickly as possible.

When Closing an Account Is Beneficial

If you have multiple credit cards that you’ve just repaid, and several of them are incurring debt with a penalty interest rate applied to the balance on a monthly basis, it is crucial to keep a certain number of accounts open to keep your utilization rate from dropping too low. The utilization rate, also known as the debt credit ratio is the percentage of debt in comparison to your available credit on all of your credit cards. If you have four credit card accounts, and each one has a $1000 spending limit, you have $4000 in available credit. If you still owe $1000 on one of your cards, you currently have a 25% utilization rate (which is underneath the recommended 30%). However, if you close one or two of those accounts your available credit drops causing the utilization rate to rise to levels that are detrimental to your credit score. Thus, it is important to be selective when choosing which credit cards to keep, and try to repay all of the cards before choosing so that you’re not forced into keeping less than ideal accounts open simply to repay them.

Which Accounts Should You Try to Keep Forever

If you had a credit card for several years and have a consistently good payment history with it, but recently failed to make a payment on time or in full, there is no reason to close the account. This is especially true if you have been earning points towards rewards, such as frequent flyer miles, free gasoline, vacations etc. Any credit card that offers benefits, has a relatively low interest rate, and does not charge unfair fees should be kept for as long as possible. Ideally, if you want perfect credit or you want to repair your credit as fast as possible it would be best to never close an account at all and simply keep all of your debts paid.