With the possibility of it having an effect on your credit score, or simply wanting to eliminate the number of cards you have, credit card accounts need a careful look before closing them. Each account you close drops the credit availability ratio, and most often any rewards that you have earned will disappear once you close the card.
Your First Credit Card
It takes about 6 months to get a good history, so your credit score can be calculated. For this reason the first credit card- not debit nor pre-paid card, needs to be kept for a minimum of six months. This will allow you to have a record of your spending habits, and build the basis of a credit history. Choose carefully- there will be many offers available, and the time you spend comparing the regular rates, fees, and other factors will let you choose the best possible card for you.
Other card offers will come in- these may offer better rates, or a higher credit limit. Keep the card you chose first: not having more than one credit card to pay off will not only help your finances as you build credit, but offers that come in later may be better deals once you have the credit history in place.
Once you have chosen a second card, then you can consider closing the original card. The lower credit balance will add to your overall credit available, but also introduces the possibility of fraud. The credit card was used consistently, and now is not used at all is an indication that the card number may be available for fraudulent use. As with all bills, even if you think you don’t owe anything, be sure to check your statements. And if there is a possibility that your information may have been accessed, a daily habit of checking your balance will prevent the use of cards that are in your name by someone else. Closing unused accounts will stop this potential credit-wrecking problem.
Secured cards, for those with no or bad credit are the most expensive, and the least likely to be a long-term choice for a main credit card. Once you are able to qualify for a better card, take advantage of it, and move to a card that requires no deposit, and has lower fees and interest.
Store credit cards, while they normally do report to the credit bureaus, are not given the weight of other credit cards. These low-limit cards are nice to have, but once you qualify for a higher-limit general card, consider getting rid of these for the high interest rates.
On a credit score
Good information normally stays on a credit report for 10 years, while negative information has a legal limit, and must be removed after 7 years. This allows the credit history that you have built to have an effect on your credit score for many months after you close an account. Also, for some period of time, the credit available through the card will be figured into your credit utilization ratio, since you did have access to that amount of credit. Credit card companies look at how much of your credit you are using, so closing a card with a $500 limit will affect the ratio less than closing one with a higher limit. Closing unused credit cards slowly, and keeping only the cards you use – and that have the best rates – will show that you are building positive credit habits, and not overspending.
Once a card is closed, it’s a good idea to keep an eye on your credit score for a few months. Not only will this keep your credit limit in your awareness, but will insure that no one is using your old cards.
- Late payments. A card that you have made a late payment on- even minutes will not be reported to the credit agencies for 30 days. But if there is a second late payment, this can trigger an increased interest rate, normally lasting a minimum of 6 months. If the penalty rate is going to be left in effect indefinitely, it may be worth it to consider paying the balance off, and closing the credit card. The late payments will remain on your credit history, but having a card with lower interest rates may be worth it.
- Length of time. One factor, not often thought of, is the length of time you have had credit there. A credit card that has been open for months, then closed, will have a smaller effect than a card that has been in use for years.
- Pay off the card. Make sure, by calling the issuing bank, that your balance is zero before canceling any credit card. There may be residual interest on cards, and the company has a chance to become aware of any issues you may have had that convinced you to close this card versus another one.
- Don’t expect accounts to close themselves. A credit card that isn’t used but not officially canceled is treated as still active, and can still collect penalties and non-use fees, leaving a balance on an account you didn’t think you had.
- Think ahead. Leave, with your will or other documents, a listing of your credit cards, and what to do about them. A card in your name only can be safely closed, but one that you have jointly with someone else will need special treatment.