Closing a credit card could have tremendous effects on your credit score and your finances. As such, there are many reasons to keep a card. On the flip side, some cards are just not worth their plastic and should be ditched. The trick is deciding what kind of card you have. Here are some things to think about before “closing your zero balance credit card”.
The Case For Keeping It
The biggest reason to keep that old credit card is to protect you credit rating. Closing a good credit card can have a big negative effect on your score for two reasons.
Two of the factors that come into play when your score is calculates are the length of credit and credit utilization.
The length of time you have had credit is a big factor because it shows a long history from which you can be judged. A person who has managed credit for 25 years successfully, is far more reliable than someone who has done the same thing but for only 5 years. If that credit card is one of your oldest accounts, it could turn your good credit into bad credit. This is because it would shorten your length of credit.
Another factor that is used to determine your score is credit utilization. In general, you should be using less than 30 percent of your available credit. If you close an account with a zero balance, you will increase the amount of credit that you are using, potentially lowering your score.
So, if your card is not costing you anything to keep, no annual fee, you should consider keeping it. This is particularly true if it has a high limit and is one of your older accounts.
The Case For Closing It
The biggest reason to close a credit card is if there is a fee associated with keeping it.
Many cards, especially rewards cards, come with an annual fee, most around $95.
If it is a card that you do not use and you are coming up on another annual renewal, consider closing it. This is especially true if the card is not very old and/or does not have a very high limit.
But what if the card does have an annual fee and is one of your oldest lines, what do you do then? You have two choices.
You can suck it up and just pay the annual fee to protect your credit score. That is one option but probably not a good one. The card may be boosting your score but probably not enough to justify paying for the boost.
Your other option is to call the credit company and threaten to close the account. Credit card companies want to keep customers. It costs a lot to bring in new clients. Chances are good that threatening to cancel the account will result in an agent finding you a deal to waive this years annual fee. You will have to repeat this every year but be prepared, some companies might just call your bluff.
So, if a card is costing you an annual fee and/or is not very old or has a low limit, you may be better off canceling it. Or at least threatening to cancel it.
Handling Unused Credit Cards
If you have an old card that you intend to hang on to but keep paid off, there are some things that you should do.
First, you need to think card security. If you have a safe at home, keep the cards in the safe. If not, get a safe deposit at your bank and keep your unused cards there. Safe deposit boxes are cheap and you should probably have one anyway. They are great for protecting hard to replace documents like social security cards, birth certificates and passports.
Second, you need to use that card a couple times a year. This is not to say that you need to charge it up, but you should try to use it once every six months. The reason is to keep your account from being considered dormant. If a card issuer determines this, they may choose to cancel the account to get it off their books.
Just make a small charge twice a year and pay it off in full when you get the statement. That will keep your card active.
FAQ’s On Zero Balance Cards
- How often should I use a card to keep it open?
Every credit card company is different. We recommend using the card once every six months. For some, credit companies, this might be overkill. They might not close your account unless it is inactive for years. For some, it might not be enough, they might close your account if it is inactive for just a few months. That is rare though. In general, using it every 6 months should do the trick.
- How much will closing a credit card hurt my score?
That will depend on your situation. If it is a fairly new and low balance card, it might not hurt your score at all. If your other cards have high balances though, it might cause a substantial drop in your score.