Closing a Paid Off Credit Card Account: Good or Bad?

After several months of paying more than the minimum on time, you have finally settled the entire balance on one of your credit cards. This is a great financial accomplishment, yet you may feel that you don’t want to go through that nightmare again, so you’re thinking of closing the credit card.

Is this really what you want?

It’s true that closing a credit card account can help you better manage your other credit accounts. Having one less credit card bill to worry about each month will certainly feel like a load is off your shoulders. If you’re not worried about your credit score losing precious points, feel free to do so. But if you have plans of applying for credit anytime soon, you may want to keep that account open.

Financial Industry experts agree that when it comes to your credit, you’re generally better off leaving a credit card open and not using it rather than closing, especially if you have few positive credit score factors on your credit history.

Why is closing a credit card bad?

Closing or canceling an account doesn’t help your credit score; instead, it will have a negative impact on your rating. This is especially true if the card that you’ll be closing is one of your oldest credit cards.

Age of your credit history makes up 15% of your score, so when you close your credit card, you also let go of a chunk of your credit score. This is why it’s imperative to keep your accounts open even if you rarely use them.

Why closing a credit card can be bad. Infographic by Continental Finance.

And this issue doesn’t just impact people in debt. Closing a credit card, especially an older card, affects anyone who uses credit. Your credit history is affected by your credit utilization, even if you pay off your balance in full every month.

Balances are often reported to credit bureaus mid-billing cycle. And so leaving your credit card alone even after paying it off plays to your advantage. For example, if you carry a card with a $500 limit and you charge $300 in a month you could essentially be utilizing 60% of your available credit. That’s well above the recommended credit utilization rate of 30% or less, and thus that could drag your credit score down.

But if you have a larger amount of credit available, your utilization decreases. So let’s say you still have that $300 balance, but you have a total limit among a few cards that equals $2000, you now have an overall utilization of 15%.

Rules of thumb when considering to close a card

People should be cautious and not make credit decisions based solely on their credit score. Rather, people should look at the whole picture and make decisions based on their overall financial situation, their need for the credit card account, and their ability to repay debt.

So break that down into three categories:

  • people with strong credit history
  • bad credit history
  • and those with medium strength credit history

If you have a strong credit history then closing a card or multiple cards would likely have a minimal impact on your scores. You would be looking at a small shift in points that would not affect the available credit that you would be approved for.

If you have serious credit problems and are have trouble managing the debt you have, then having open accounts may be too big a temptation. You may want to consider closing the card because it is better for your overall financial stability.

But if you’re in the middle, or in the process of rebuilding your credit, this is where closing a card and losing points to something like higher utilization percentage, causes too much damage. Having the willpower to maintain positive credit activities, and being able to leave a card unused will over time help you maintain a better credit score.

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Continental Finance is one of America’s leading marketers and servicers of credit cards for people with less-than-perfect credit. Learn more by visiting ContinentalFinance.net

How to Stay in Your Financial Lane

Back in 2011 Kevin Hart put out the popular “Laugh at My Pain” stand-up special. In this special was one of his more famous bits, the “Financial Lane” piece. The humorous anecdotes Hart shares in this routine all revolve around the age-old concept of Keeping up with the Joneses and demonstrate the pitfalls of lifestyle inflation and lifestyle creep. In short, Hart doles out some sound financial advice that we all can relate to by sharing the funny aspects of when you hang out with athletes or when you meet other people that make money.

Personal finance is an ongoing responsibility. Kevin Hart may describe himself as a money moron, but he knows what needs to be done to stay in your lane even when you realize your dream and start to make money at a much higher rate than before achieving financial freedom. The following tips will help anyone with a bank account learn what needs to be done to achieve financial goals while adhering to the basics strategies about staying in your financial lane.

Staying in Your Lane Leads to Financial Freedom

Staying in your financial lane means keeping your expenses less than your income. Of course, this is easier said than done and people tend to divert from their financial lane without noticing it. Savings, loans, emergency funds, and credit cards can distract you from being in your financial lane, as these allow you to acquire more things than your income would allow. So how does someone stay within their financial lane?

Study how much you make

First step in staying in your financial lane is to know how much you make each month. Memorize your annual salary, monthly and even your hourly rate, so you can make yourself aware of what you can and can’t spend each month. Aside from the net amount of your income, you should know when you get your paycheck so you can streamline it with your monthly expenses. By doing this, you lessen the chance of missing on your payments.

Lower your expenses

Now that you know how much money you bring in each month, reducing your spending is the next step. With a better knowledge of how much you can work with, creating a limit on your expenses is much easier. Write down all your monthly expenses and deduct that from your income and the difference will be the money you have available for any other living expenses. Your daily budget will likely be smaller than what goes to your monthly bills, and this budget will be much simpler to monitor and manage. It will be easier for you now to avoid exceeding your financial capacity.

Don’t just rely on your credit cards

If you’re building your credit, it’s important to know that you shouldn’t use your credit cards on all of your expenses. Your credit card should only be used on things that you can pay in full, before the cut-off date of your statement. This way you can avoid incurring finance charges that would lower your financial ability. Credit cards should only be used for what you can afford.

Create an emergency fund

If you don’t have one yet, you should start building one right away. Saving money and paying off your debt are the keys to the success of your plan to stay in your financial lane. This emergency fund is a safety net that will help you address any emergency expenses that might arise in the future, be it the bill you didn’t expect, a problem with your business, or a good investment for your future cropping up during an inopportune time. This emergency fund will allow you to avoid the need to take up a loan or use your credit card to pay off unforeseen expenses. Should your fund not be enough, using the money from your financial safety net would still lessen the amount that you would be borrowing.

In Conclusion

Staying in your financial lane is a good habit to get into when managing your debt and personal finance. No one is asking you to do something extreme like go a month without spending. To stay in your financial lane and keep from harming both your bank account and your credit score, you simply need to be responsible and curb the temptation to give into lifestyle inflation. When you obtain your financial freedom, you just need to be wary of the pitfalls that can put you back in debt.

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Continental Finance is one of America’s leading marketers and servicers of credit cards for people with less-than-perfect credit. Learn more by visiting ContinentalFinance.net

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