"Credit card debt happens, and if you have some, you probably don’t feel great about having it, which is why when you’re in the midst of trying to figure out how to pay off the debt you accumulated, it’s understandable to consider just closing the credit card. If you don’t have the card anymore, you can’t use it, right? Problem solved.
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Closing your credit card is an option that is available to you, yes, but it might not be the right decision to make. There are some benefits associated with keeping your credit card open—even once you accumulate debt—that are worth taking into consideration.
To help you make an informed decision about your next credit move, here are a few things to keep in mind when you have credit card debt before you decide whether or not to keep the card (or cards) you have a balance on.
Can you close an account when you have a balance?
Even if you have an unpaid balance on your credit card, you can choose to close it. You will still need to make payments on that card even after you officially close the account, but you can eliminate the potential of increasing your debt by not being able to use the credit card anymore.
If you choose to close the card, you will continue to receive monthly statements that list what your current balance is, how much interest you accrued, and what the minimum payment you need to make is. Even with the card closed, interest will continue to accrue until you pay off the balance in full. Your legal requirements to repay the debt and interest charges won’t change at all.
On the plus side, once you close a card, the card issuer won’t be able to charge you higher fees than you currently pay (like late fees) and they can’t introduce any new fees.
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Are there downsides to closing a credit card?
One benefit of keeping a credit card open even once you accumulate a decent amount of credit card debt is that doing so can actually help improve your credit score. We know that having a card with a balance on it doesn’t sound like a good thing, but hear us out.
When you close a credit card, you can increase your credit utilization ratio. Your credit utilization ratio compares how much credit you have available compared to how much you’re using. The lower this ratio is, the more your credit score will benefit. When you close a credit card with a balance, you’re lowering the amount of available credit you have while maintaining the same amount of used credit, which can really increase your credit utilization ratio. Locking the credit card away and not using it until you pay off your balance can help you keep your credit utilization ratio high without adding more debt to your plate and effectively lowering it.
Having different types of credit accounts open also improves your credit mix, which helps your credit score. Credit scoring models want to see that you can manage a few different types of credit. Let’s say you have a student loan, auto loan, and a credit card. If you close your credit card account, you’re lessening your credit mix and your credit score can take a hit. If you keep your credit card open and add in a home loan, you can improve your credit mix and your credit score.
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Are there advantages to closing a credit card?
On the flip side, there are some times where you may decide that the benefits of closing a credit card outweigh the cons. For example, if you pay a hefty annual fee to use the card and you no longer intend to use it, then you’ll likely want to cancel the card and save your money. Having less credit cards open can also make it easier to manage your finances and to focus on using the credit cards that offer the best rewards.
Speaking of rewards, if you accumulated rewards points, cashback, or other perks and haven’t redeemed your rewards yet, then you risk losing them once you close your account. If you decide you do want to close a credit card, make sure you redeem any outstanding rewards first.
Again, the main benefit of closing a credit card that led to debt is that you won’t be able to use it anymore and add to that debt. However, it’s not truly necessary to not use the card at all in order to get a handle on your debt. You just have to be honest with yourself about your spending habits and whether or not you’ll be able to make monthly payments moving forward so you don’t increase your balance.
The takeaway
There is no right or wrong answer regarding whether or not you should close a credit card you have a balance on—it truly comes down to the individual. If you can manage to not add to your debt, keeping the account open can be beneficial to your credit score, but in some cases, the cost of an annual fee and the risk of increasing your balance are just too high. Think carefully about how you can manage this card and future credit cards to ensure you’re reaping all of the rewards that come with credit cards without having to deal with interest payments, fees, or a bruised credit score.