I’m sure most of you have been told that credit cards are bad and they cause nothing but trouble. While this is not completely false, credit cards can provide great benefits if used correctly. For more on how to use credit cards properly, see my article “Credit Card Best Practices”. The purpose of this article is to demonstrate why you should think twice before closing out credit cards that you already own.
This topic was brought to me by a client of mine. He had a card that he owned for years but rarely ever used and it didn’t offer much value. The rewards weren’t that great, the APR was higher than his other cards, and to add icing on the cake the card charged him $39 a year to keep. I know most of you are thinking, “this is a no brainer, close the card and get on with your life…and pocket the $39”. This would be conventional wisdom but let’s take a step back and understand the credit implication that this action would have. This could negatively affect your credit score in 3 ways.
After this analysis do you still think this decision is a no brainer? Everyone’s situation is different, so I am not saying to never close out credit cards you don’t use but please do a careful analysis. In my client’s situation, this was his oldest card and had the most available credit. So, if he closed this card it would be detrimental to his credit score. As far as the $39 a year, try obtaining a loan with a 600 vs 700 credit score… the difference in interest rate with make that $39 laughable.
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