Closing credit card account with balance is a very bad idea
If scenario described just below sounds familiar, I bet you almost certainly contemplated closing credit card account with a balance at some point. That is wrong way out of credit card debt and inability to stop spending. You should only do it in one case - you are delinquent on a credit card and it is too expensive to keep because of high interest rate, penalties, fees, etc.
Way too many consumers are very eager to use their credit cards over and over again, buying stuff they don't basically need or can be just fine without. Moreover, they don't have enough cash to buy it outright or even if they do, it feels much nicer to pay with plastic. Sounds familiar? Then come monthly credit card bills, new purchases because you can't stop buying more cool stuff. Finally it hits home, I can't afford this anymore, yet I can't stop buying.
Then comes a bright idea - how about closing this pesky credit card account with unpaid balance? Sure you will continue paying it off and because you can't charge it anymore, in several months it will be it.
1. If you have a credit card in good standing with balance, closing it will bring credit limit to $0. FICO will then consider the remaining balance as the credit limit, giving you 100% debt utilization ratio, so your credit will suffer. If this is your only credit card or you close several cards, or all you have at once, the damage to your credit score can be quite significant. Of course, if you are delinquent to start with, this consideration does not matter.
2. Closing all credit cards accounts with balance or without also hurts your credit score because FICO wants to see a nice mixture of credit types - revolving, installment, mortgage. You should only do it when decide to live cash-only way for a while. Basically, you don't plan to apply for any type of credit any time soon. I know a surprising number of people who did just that.
3. If the credit card you want to close is an old well-established account, it is not a very smart move. The older the account, the better it is for your credit score. See Closing credit card accounts hurts credit score
4. Contrary to what many believe, closing credit card will not protect you from identity theft. If your credit card gets lost or stolen, under every agreement I have seen, you are only liable for $50. Most issuers doesn't charge even that. The only personal information it carries is your name. No social security, no address, age, phone, etc.
If you really hate that credit card and feel it is ruining you financially, simply cut it in pieces and just keep on paying it off. Keep account open. You can't even purchase online anymore, because Internet orders now require the 3-digit security code which can only be found on the card back. If you still have problems, throw away the information packet which always comes with credit cards, except the card number and phone.
But what if you need some credit in case of emergency, like a new transmission or furnace. For those rainy days, I would advise you to simply put it away. Then once every three months or so, dig it out and use it on some necessary things, not cool stuff, just to show some activity and keep issuer from closing your credit card due to long stretches of inactivity.
Finally, keep a close look at your credit report,
Dispute Experian credit report
Dispute Equifax credit report
Dispute TransUnion credit report
Sun Mar 13, 2011 06:03PM | Copyright: www.bad-credit-advisor.com | More in Credit Repair Tips | Comments (0)
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