When should you cancel a credit card?
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There are plenty of reasons to consider closing a credit card, and they aren’t limited to just finding a better one. You could find yourself in a situation where you’re no longer getting the value from a high-annual fee card.
You may even be tempted to close a credit card that has a balance as a means to stop yourself from using it, and that’s perfectly reasonable.
While you typically can close a credit card that still has a balance, keep in mind that you’re still responsible for making your monthly payments until your entire debt is paid off. This includes interest charges that accrue as well as any fees you rack up.
What’s the likely effect on your credit score?
Regardless, closing a credit card isn’t the end of the world. You just have to keep the consequences in mind. For example, no matter why you choose to close a credit card account, you may notice an impact on your credit score.
Closing an account reduces the amount of available credit you have, thus increasing your credit utilization. Since the amounts you owe in relation to your credit limits makes up 30 percent of your FICO score, it shouldn’t surprise you that closing an account can cause your score to drop.
Also note that closing a credit card can reduce the average length of your credit history, which makes up another 15 percent of your FICO score. Causing the average length of your credit history to decrease can also ding your credit score, which is never a good thing.
An alternative to closing a card with a balance — paying off your debt
If you are worried about the negative impacts that come with closing a credit card with a balance, you may want to consider an alternative — keep your account open and focusing on repaying your debt instead.
You may feel as if you should close your account in order to reduce the temptation to keep spending, but there are other ways to make sure you’re not racking up more debt. You could put your credit card away for safekeeping, for example, whether that means stashing it a home safe or freezing it in a block of ice.
Paying off your debt can have a positive impact on your life but also on your credit score. After all, paying off debt decreases your utilization, the second most important factor that makes up your score.
Since your payment history makes up 35 percent of your FICO score, your on-time or early credit card payments can also help you build better credit over time.
Consider transferring your balance
While paying off your debt with the card you have is always a possibility, you can also move your debts to another credit card with a balance transfer. Doing so could help you save big on interest every month, and you could even secure zero percent APR for a limited time.
As an example, the Discover it® Balance Transfer gives you an intro zero percent APR for 18 months on balances you transfer from other cards, followed by a variable APR of 13.49 to 24.49 percent. A 3 percent balance transfer fee applies to your first transfer (which climbs to 5 percent for subsequent transfers, See Terms) but the interest savings can easily add up to hundreds or thousands of dollars.
How might this work? Imagine you have $4,000 in credit card balances at 19 percent APR and you normally pay $200 per month. Using Bankrate’s credit card payoff calculator, it would take you another 25 months to pay off your debt and you would fork over $848 in interest charges in the process.
If you transferred those balances to the Discover it® Balance Transfer, on the other hand, you would owe a $120 balance transfer fee but pay no interest for the introductory 18 months (13.49 – 24.49 percent variable APR thereafter). If you were able to boost your monthly payment up to $228.89 each month, you could pay off your entire balance plus the balance transfer fee within 18 months, saving over $800 and cutting 7 months off your repayment timeline.
Also remember that there are a ton of different zero percent APR cards to choose from, many of which offer their own unique terms. If you want the longest zero percent APR offer available, for example, you can consider the Citi Simplicity® Card. This card gives you zero percent APR on balance transfers for a full 21 months, followed by a variable APR of 14.74 to 24.74 percent. A 5 percent balance transfer fee applies (minimum $5), but the savings could make the fee well worth it.
If you do choose to transfer a balance to a zero percent APR credit card, make sure your entire balance has been transferred over before you stop making payments on your old card. You may be able to verify this online via an account management page, but you can also call the card issuer and ask them to check. (See also: How to do a credit card balance transfer).
When should I close a credit card with a zero balance?
What happens when you pay off your credit card balances, either with the card you started with or a new zero percent APR card you signed up for? At that point, you could close your credit card with a zero balance or you could keep it open. It’s really up to you.
Experts suggest that keeping old accounts open can make a lot of sense — even if you don’t use them. That’s because, as we suggested already, keeping old accounts open increases your amount of available credit as well as the average length of your credit history.
The bottom line: You can close credit cards with a zero balance, but you certainly don’t have to. If you’re worried you’ll be tempted to use an old card to rack up a new balance, stash it away in your sock drawer.