Pros and Cons Of Closing A Credit Card Account

Credit Cards are one of the best ways to overcome a situation of a short-term financial crisis. Having a good credit card makes our life smooth and easier when we are running low on finances. Whenever you apply for a credit card, you get a credit limit on your credit card that is pre-defined by the bank. Credit cards come in very handy not only when you have to buy something but are also very useful when you have to make rent payments, utility bills, etc. But it is not mandatory that once you have a credit card, you must keep using it for a lifetime.

If you have multiple credit cards, and you are not able to effectively manage those credit cards, they will do nothing but will start affecting your credit score in a negative way. Although credit cards help you in establishing and building your credit score but if you have more credit cards than you need, the credit cards that are not in use will Hence, you are left with no other option but to close your credit cards. But lesser do we know that there are both positive and negative aspects behind the closure of a credit card. Here, in this article, we will discuss both the pros and cons of closing a credit card.

Pros of Closing a Credit Card

Following are a few advantages closing down of those credit cards that are not in use anymore –

Won’t be tempted by the available credit limit

Some people have a habit of getting tempted by the credit limit that is available to them. They sometimes forget that they even have to pay the amount that they use from the credit card. They keep on blindly using a credit card to fulfill their needs and then not paying the bills on time will ruin their credit score. Hence, for such kinds of people, it is better that they close their unnecessary credit card accounts, which will hence be a smart move for them to gain financial stability.

Get your deposit back in case of a secured credit card

A secured credit card is a type of credit card that you get against a fixed deposit with the bank. Students or youngsters start with such types of credit cards as they are easy to get and good to build a credit score. But once you are stable with your credit score, and have grown to such a score that you are now eligible to get a normal credit card, then you can close the secured credit card account, after which you can get your funds back.

You don’t have to keep track of other credit cards

When you have multiple credit cards, it becomes your responsibility to manage all these credit cards by remembering the billing dates and payment dates of these credit cards. In case you don’t use your credit cards for a period of time, the credit card companies will eventually end up closing your account. Hence, if you want to keep these accounts active, you have to do a certain amount of transactions using your credit card and then pay the bills on the due date, which is quite a task. Hence, if you have multiple credit cards and you generally do not use all of them, you should close the ones that are not in use in order to save yourself from the hassle of managing your credit cards.

Do not have to pay an annual fee

Paying the annual fees for those credit cards that are no longer in use is a sheer wastage of money. Hence, you should happily close down those credit cards that you do not use anymore and save the amount of annual fee that you pay towards those credit cards.

Cons of Closing A Credit Card

While there are some positive aspects related to the closure of credit card accounts, there are some cons as well. Below are the cons of shutting down your credit card –

Loss of credit utilization ratio

Whenever you close a credit card, you damage your credit utilization ratio as well. The credit utilization ratio is the ratio calculated on the basis of the amount of credit limit used with respect to the total credit limit available. And, credit limit utilization is a major factor that helps in determining your credit score. Therefore, any damage to the credit utilization ratio will lead fall in your credit score.

Loss of availability of credit

You may consider closing down your credit cards that are no longer in use but in times of need, or during a financial crunch, you would wish to have any kind of credit limit available with you. Obviously, you can apply for a new credit card, but that would take time and will not be available when you actually need it. Hence, the closing of extra credit cards would lead to a loss of credit limit availability. Therefore, you should consider every situation once before closing a credit card.

Reduce the length of credit history

The length of credit history also plays a major role in determining your credit score. Once you close down a credit card, you would lose all the credit history which is linked to that card, and hence would hurt your credit score. Therefore, considering the possible impacts that the closure of credit cards would have on an individual’s credit score, one might not want to close down their credit card accounts.

Loss of Rewards and Benefits

Credit cards provide a lot of features and benefits such as reward points on transactions that you make using your credit card, complimentary access to airport lounges, fuel surcharge waiver, dining benefits, zero lost card liability, etc to credit cardholders. When a cardholder closes his credit card account, this means he will lose all the benefits that pertain to that specific credit card.

Bottom Line

Whether it is to keep yourself from spending more money or cutting down on your revolving debt, the decision to close down a credit card account should be taken very cautiously. While having multiple credit cards provide you with many benefits and help you in time of emergency, the closure of credit cards lead to loss of reward and benefits and will impact your credit score as well. Therefore, the applicant should well analyze all the situations, positives and negatives and then take a decision that whether he would want to keep a credit card or close a credit card.