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So you’re moving to Patagonia to spend your life trekking across the cordilleras and swimming in glacial lakes. Excellent choice. Only one thing left to do: Cancel all of your credit cards — the ones you’ve racked up huge balances on. Before you go off the grid, it is important to consider if closing an account with a balance is the best move for you and your credit score. You may think you won’t need any of these things anymore, but it gets pretty chilly in the winter months in southern Chile, so perhaps reconsider.
Find The Best Credit Cards For 2022
No single credit card is the best option for every family, every purchase or every budget. We’ve picked the best credit cards in a way designed to be the most helpful to the widest variety of readers.
Is It Better To Pay Off a Credit Card or Maintain a Balance?
It is best to pay down your credit card balance in full each month on time. We never recommend carrying a balance if you can avoid it. If you carry a balance on your card month to month, you will begin to accrue interest which can quickly increase the total you owe. Whenever possible, you should only charge purchases to your card when able to pay them off in full before you begin to accumulate interest on those charges.
What Happens When You Close a Credit Card with a Balance?
You can close a credit card with a balance, but there are a few things to keep in mind. First, by closing the credit card you will no longer be able to use the card to make purchases. Second, you are still responsible for paying off the rest of your balance. Third, the outstanding balance can still accrue interest. It remains imperative to pay off the remaining balance as quickly as possible.
Does Closing Your Credit Card Hurt Your Credit Score?
Closing a credit card can affect your credit score and closing an account does not repair any damage the account has done to your credit. Late payments will still appear on your report for about seven years. Accounts in good standing will disappear after about 10 years.
Your credit utilization rate is calculated by comparing the amount of credit you’ve used with the amount of credit you have available across all credit accounts. We don’t recommend using more than 30% of your total available credit, as anything higher can detrimentally affect your credit. By this logic, closing an account can reduce your overall available credit and thus increase your credit utilization rate. If this means bumping the rate over 30% or putting you at risk to do so more regularly, this could have a negative impact on your credit score.
While a closed account may improve how your credit report displays your creditworthiness to potential lenders by reducing the number of open accounts, sometimes leaving the account open (though inactive) can still be better overall for your score.
The length of your longest-held account can also impact your credit score. Closing an older card just because you have stopped using it isn’t a great idea because it reduces the overall length of your active credit history, which can reduce your credit score and hurt your credit.
Is Closing Your Credit Card a Bad Idea?
Whether or not closing a credit card is the right financial move for you depends on your financial situation, but it warrants serious consideration before you take steps to do so. Sometimes you may be eligible to switch an account to a new card, which can be a way to get a lower annual fee or different card terms. If you’re concerned about fees, rates or other issues with your card, contact your issuer to discuss options that may help you keep your account open but use a different card.
You also may want to keep your account open and simply not use the card (sometimes referred to as “sock drawer-ing”) or not use it as often. This could be a logical option if you still have rewards from using your card to redeem since closing an account can result in forfeiting all unredeemed rewards. Closing your account can be beneficial if you want fewer accounts to have to manage or want to reduce the risk of seeing your identity stolen. Be wary of closing too many accounts for reasons mentioned above.
Always pay off balances entirely every month where possible. Closing an account does not relieve interest, fees or other negative impacts not paying your bill can have on your balances or your credit. Closing credit cards can both negatively and positively affect credit, so be sure to understand your full financial and credit picture before doing so. Ensure you close accounts in good standing and redeem all outstanding rewards before doing so.