With hard economic times and soaring debt, you may find yourself asking if it would be wise to close or cancel a credit card account in the attempt to prevent further debt or even improve your credit score. Closing a credit card account can prove either very wise or a significant hit to your credit score depending on your situation.
Account With a Balance
Consider the balance of the card you are thinking of closing. If it still has a balance it is best to keep the account open while you are paying it off. Each month, if the creditor reports regularly to a credit bureau, your credit score will improve slightly as your debt-to-credit ratio improves. Part of what makes your credit score is the percentage of available credit you use. Maxing out your credit cards hurts your score while using only 20 percent or so of your available credit on any given account improves your score.
Account in Good Standing
If you are looking to improve your credit, do not close your credit card account especially if the account is in good standing. According to The Motley Fool, closing an account in good standing will make it fall off of your credit record after seven years. Allowing good credit to fall off your record is not ideal, especially since keeping the account open can improve your credit score. The length of your borrowing history contributes to 15 percent of your credit score. Even if the account is in just moderate or fair standing, closing it may hurt your score by dropping off years of borrowing history or changing your debt-to-credit ratio.
Account Paid Off and Unused
If the credit card account is fully paid off and relatively unused, feel comfortable closing it. While it will probably ding your credit score slightly, it can easily prove worth the ding. Many credit cards charge annual fees just to keep the account open and some charge "nonuse" fees. Also, keeping an unused credit account open can create an increased risk of identity theft if you do not monitor your credit score, history or account activity regularly.
Other Considerations
The greatest consideration in whether to close a credit card account must be your personal finance style. If you are a spender who will have a hole burning in your pocket with an open credit card account with room to charge, by all means cancel the account to avoid putting yourself further into debt. If you are the responsible type who pays off the credit card each and every month in full, then leaving it open may be the wiser choice if only to maintain your available credit and good score.
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