Credit cards are quite essential to our day-to-day lives and not only for the consumer. They are also crucial for the manufacturers too. They essentially ensure that the financial wheel runs smoothly. They keep the economy alive and kicking, even though debts can be detrimental to the economy in the long run.
But credit card debt is what most financial experts refer to as good debts. That’s because they can easily be paid off on a monthly basis in small portions. But what can you do when the services of the card don’t suit your way of life anymore?
Most often, you will consider closing the credit card account. But is that a good idea? What does it mean for your financial standing when you close your credit card? Well, here’s what it means and why it would be a mistake for you to close your credit card.
Closing With A Balance
One thing you should consider when it comes to closing your credit card is if you’re closing it with a balance. If so, consider the impact it will have on your score long term. First, you need to know that closing your card with a balance, makes your available credit and credit limit become $0.
In other words, your card will reflect like you have maxed out your credit card. That takes away up to 30% of your score due to your credit usage to credit ratio. Maxing out your limit negatively affects your credit score long term, which is what happens when you close your card with a balance.
It’s Your Only Credit Card
The worst thing you can do to your score is to close your only remaining credit card. Did you know that your credit score depends on around 10% of the available credit. See, your score is, at times, determined by how you’re managing your debt.
So, if you close your card when it is your last available credit, you can hurt your score immensely. The best thing you can do is leave at least one card open and manage it well to prove to any other lender out there that you can manage a loan if offered one. The other idea here is to try and use one card at a time.
Closing A Card With No Balance
If you thought to close the credit card with a balance was the most detrimental decision you could make, then the other one is closing a card without a balance. This is because a credit card without a balance has available credit on it.
For example, if the other cards you have in possession don’t have available credit, the one with an available credit helps your score by lowering your credit utilization rate.
When It Has The Best Terms
When it comes to credit cards, the worst mistake you can make is to close your credit card when it has good terms. For example, you have a card that offers some of the best perks including travel insurance. Why would you want to get rid of it?
Do you have a card that has low or no annual fees at all, low-interest rates, and a number of other perks? Then, why let it go? The best move you can make is close the ones with lesser terms and leave the card with better terms activated.
It all comes down to protecting your credit score. Whether you’re closing the card with a balance or the one without a balance, you’re likely to hurt your credit score long term. These are the scenarios your credit card may be in at any given moment and why you shouldn’t close it.