Closing a credit account can be tricky business. While it seems harmless, the damage to your credit score can pack a punch if done incorrectly. Hurting your credit utilization ratio and credit history are among the many considerations. So, with evidence piling up in favor of keeping accounts open, when is it a good idea to close an account?
Credit accounts should work for you, not against you. When bad credit creeps up, it’s time to determine the culprit. Although closing an account is a big decision, some are no-brainers, especially in the case of:
- Identity theft. Bad credit is unfairly doled out when another person steals your credit information. Many thieves can charge thousands in debt before anyone notices, so it is important to review your finances carefully. If you spot an unauthorized charge, call your creditor immediately and close the account to prevent further damage. Ask your creditor to refund the fraudulent purchase prices and reinstate your account with another different account number. Finally, if the creditor will simply invalidate the original card and change the account number without closing it, that will prove least harmful to your score.
- Too many cards. While the credit bureaus may generalize the scoring process, some will tell you why bad credit is plaguing your score. For example, if you own too many consumer credit cards, your credit may suffer as a result. On the other hand, if you simply close cards, your score may plummet. One thing to look for: Multiple cards from the same creditor can often be combined into one account, thereby lowering the raw number of cards while still preserving their collective credit limits. This will likely increase your credit score in turn.
- Divorce. Separating marital finances is a difficult but necessary process. Often, the family court requires you to close your joint accounts to effectively sever joint spending. Go along with this ruling and prevent your ex’s habits from spilling into your finances. Bad credit is easily born this way.
- Damage control. If excess spending has resulted in financial troubles, you may want to limit your options. Closing one account in a sea of others may curb your ability to overspend and further your worries. Yes, your credit utilization ratio and history may suffer, but the effects of overspending may overshadow these issues. If you must, close your most recent card to minimize damage to your record of longstanding credit use. The short-term effects may sting, but long-term bad credit is a greater wound to bear.
Closing an account is a serious and important choice, and one size does not fit all. Assessing your own situation is the best way to choose a course of action and strengthen your finances. Don’t let bad credit get the best of you. Rather, educate yourself and take steps to improve.