Whenever Macy’s announced a sale on Jones New York suits or high-heeled sandals, Deanna S. Walker would dash to the department store. And when her husband would travel for his business, it was such a convenience to pay at the pump with their Amoco gas card. However, the result would sometimes be a carryover of the balance since determining their monthly income was difficult with him being self-employed.
“In 2008, I closed the Macy’s card. I did so to become more fiscally responsible,” says Walker. “Closing it helped me control the urge to charge items unnecessarily,” she explains, noting that cancelling the card helped her address bad spending habits. “This was the right decision based on my goals to reduce and manage debt.”
Most experts say cancelling a credit card is generally not a good idea because it lowers your available credit and can decrease your FICO credit score as well. They suggest, instead, that you simply toss it in the shredder. The account will remain open and you will have the credit line on your report. But if you find yourself ordering a new card or purchasing items online with your memorized credit card number, you may need to take more drastic steps. In those cases, it’s permissible to break the rules of credit management. But before you do, make sure you’re not applying for a loan in the near future. Even the smallest dip in your credit scores can increase your interest rate or cause a loan to be declined.
Experts have provided five situations in which it’s OK to close your credit card.
1. You’re tempted to overspend. This can lead to excessive credit card debt for the undisciplined person. “Being addicted to credit is a real issue for some people,” says John Ulzheimer, president of Consumer Education at SmartCredit.com. “For those folks, it’s simply better to avoid the credit card environment, and closing their cards is the best way to do so.”
2. You have too many cards and need to cut back. It’s best to have three credit cards for general use. This allows flexibility if one of the issuers changes the interest rate or annual fee. Having more cards than this might tempt you to charge more. “Using one or two cards can help keep spending under control,” says Gerri Detweiler, personal finance expert for Credit.com. “The more credit cards you carry, the easier it is to lose track of how much you owe and how much interest you’re paying each month.”
3. You have a joint or are a co-signer on an account. If you are going through a divorce and have joint credit card accounts, closing the account stops any new charges and limits negative credit reporting. “If your ex goes on a spending spree, you can be stuck with the bills,” says Detweiler. “If you have co-signed an account to help someone establish credit, be sure to close the account once they are able to get their own credit. Even the on-time payments do count as your debt.”
4. The card issuer adds an excessive annual fee. Before you cancel the card, ask the issuer to waive the new fee. If they won’t do it, close the account. It’s not worth it to pay a high annual fee just to maintain a credit reference. “Unless the card is giving you hefty rewards, there is no reason to have an annual fee above $200,” says Ulzheimer. “Open a new credit card with a credit union. They don’t usually have annual fees.”
5. Your card has an excessive interest rate. Walker wisely closed her Macy’s card when the interest rate outweighed the sales and discounts. You end up paying more because the interest rates are above 20%. “Retail credit cards are subprime credit cards with a store logo. They serve one purpose: to help you establish credit. Once you have done that, move on to a general-use credit card with a low interest rate,” says Ulzheimer.