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Think Twice

What to know before closing a credit card account

Closing a credit card can be beneficial in some ways — it’s one less financial thing to worry about and it’s one less means identity thieves have to worm their ways into your financial life. However, there are some things you should know before shutting down an account.

Before you close a credit card account, the number one thing you need to understand is that it will likely have an impact on your credit score. When you shut down a card it affects credit utilization ratio, which is the ratio between the total credit you have and the amount you use each month. The credit bureaus consider credit utilization when compiling your score. To keep a top-flight credit score, you want a ratio of 30 percent or below. If it’s higher than that, lenders worry that you’re using too much of your credit and can’t be trusted to pay the bills. When you close an account, this will reduce your overall available credit and your ratio.

USA Today notes that closing a credit card will also impact your overall credit history — another factor considered by credit bureaus. If the credit card carries no annual fee, you’re likely better off keeping it open but not using it.

Another thing to consider before closing a credit card is any authorized users connected to the account. Chances are if you have an authorized user with access to the card, this is because you’re helping them build credit. Unless that person is at the right stage to be set free and build credit on their own, you might want to reconsider closing the account.

In some instances, closing a credit card can be a good thing. Just make sure you think it through before shutting things down. There’s a good chance that leaving the account open will be the smarter financial move.

Chris O'Shea

Chris O'Shea