Is it bad to close a credit card and open a new one?

Should You Close That Credit Card? The Truth About Credit Card Cancellations

Strategically managing your credit is a marathon, not a sprint. One key aspect often misunderstood is the impact of closing credit cards. The short answer is: it’s not inherently bad, but it can be unwise depending on your circumstances. Simply canceling a card won’t immediately tank your credit score, but doing so without careful consideration could negatively affect your financial health in the long run.

The primary concern when closing a credit card centers around your credit utilization ratio. This is the percentage of your available credit that you’re currently using. Lenders look closely at this number; a high ratio (generally above 30%) signals to them that you might be struggling to manage your debt, leading to a lower credit score.

Let’s say you have two cards: one with a $10,000 limit and a $5,000 balance, and another with a $5,000 limit and a $0 balance. Closing the card with the zero balance immediately reduces your available credit by $5,000, causing your utilization ratio to jump. Even if you’re paying off your $5,000 debt on the other card diligently, this sudden increase in your utilization ratio can temporarily lower your score.

Prioritize Debt Reduction Before Closure

Therefore, the crucial step before even contemplating closing a credit card is addressing your outstanding debt. Pay down balances as much as possible to minimize your credit utilization ratio. Aim for a ratio below 30%, ideally closer to 10%. This will buffer the impact of any credit card closure on your score.

When Closing a Card Might Make Sense:

There are legitimate reasons to close a credit card:

• High Annual Fees: If you’re paying hefty annual fees on a card you rarely use, the cost outweighs the benefits. Pay off the balance first, then consider closing it.
• Unfavorable Terms: If the interest rate is exceptionally high or the card offers few perks, closing it might be beneficial, particularly if you have other cards with better terms.
• Too Many Cards: Managing many credit cards can be overwhelming. Closing a card you rarely use can simplify your finances, but again, prioritize low utilization before doing so.

When Closing a Card is Likely a Bad Idea:

• Old, Established Cards: The age of your credit accounts contributes significantly to your credit score. Closing an older card reduces your average account age, potentially impacting your score negatively.
• High Credit Utilization: As discussed, closing a card when you have high utilization only exacerbates the problem.

In Conclusion:

Closing a credit card isn’t inherently destructive to your credit score, but it’s a decision that shouldn’t be taken lightly. Prioritizing debt reduction and understanding the impact on your credit utilization ratio are paramount. Weigh the pros and cons carefully, considering the age of the card and your overall credit health. If you’re unsure, consider contacting your credit card company or a financial advisor for personalized advice. Remember, responsible credit management is key to building and maintaining a strong credit history.