Do you think you need to close your credit account after you have completed a debt consolidation program? It’s probably worth thinking about if you own a lot of credit cards. This is especially true if you are not really using these cards.
According to one survey, credit card holders usually have more than one credit card. The average number of credit cards is 3 and it has a median limit of $9,500. But the same survey revealed that 1 out of 10 respondents have owned at least 6 credit cards.
But what is so bad about having a lot of cards?
Well, there are so many pitfalls that can lead you into so much debt. That probably sums up the reasons why you should be careful about how many credit cards you should own. If you had to use debt consolidation, that only means you are having trouble paying off your individual credit accounts. It might be time for you to reconsider how many accounts you can really manage.
Is it wise to close your credit account?
The answer to this question will depend on your specific financial circumstances. There are many reasons why closing a credit account will benefit you. But there are also situations wherein doing this would only make things worse.
If you really want to get your debts under control, it makes sense to keep the number of your credit cards down. The feeling will come really strong as you try to pay off your consolidated debts. When you realize just how much debt you owed and how hard it is to pay off, you would want to eliminate the temptation to use credit.
Because that is what your credit cards are. It gives you a false sense of purchasing power. Some people mistakenly feel like it is an extension of their wallets. But it really is not. Every time you use your credit card, you have to pay it back. And if you cannot pay it within the grace period, your balance will grow because of the interest rate.
This is why you have to seriously consider if you really need every single credit account that you own.
But beyond that, here are other reasons why you should think about closing credit accounts after paying them off through debt consolidation.
If you used it to “start” your credit history
We all know that it is hard to get a credit card if you have no credit history. They need it to see if you are a high or low credit-risk borrower. But the thing is, you need to use credit to get a credit history. This is why a lot of young adults turn to “starter” credit cards that have a high-interest rate and fees. If you already have enough on your credit history, then you can probably let go of this card.
If you need the deposit on your secured card
A secured credit card is another option for some people to get their credit history started. But to be issued this card, you need to provide a security deposit. This serves as your credit limit. It is the guarantee of the creditor that they can get something in case you fail to pay your dues. If you close this card, you can get this deposit back. As long as you already have a good unsecured card, there is no need to keep this card. Besides, you can use the deposit for something else – like paying off your consolidated debts.
If you are not using it
Our spending habits change over time. You may have a store credit card exclusive to one retail company that you no longer go to because your preferences changed. Check every credit account that you have and see if there are cards that you can let go of. Although you are not using these cards, it is still draining your finances through annual fees, etc. If you have no plans of using it, there is no point in keeping it.
If you don’t mind the credit score implications
To be honest, closing a credit account has credit implications. You need to know certain credit score facts to understand what these are. For instance, closing a credit card account can affect the credit utilization rate. This is the ratio of your debt to the credit limit. If you currently owe $3,000 and your credit limit is $10,000, your credit utilization is 30%. This is still a good ratio and will help you get a good score. But if you close a credit account with a $4,000 credit limit, your credit utilization rate will change. The balance will still be $3,000 but the limit will now be $6,000. That means your credit utilization will now be 50% – which is too high. This can bring your credit score down significantly.
And if you are closing the credit card that you started with, that can also affect the average age of your combined credit accounts. It will not be immediate because it will only be reflected after 7 to 10 years. But by that time, you may be trying to get approval for a home loan. Your actions now may affect your future plans.
Options if you don’t want to close your credit account
In case you are having second thoughts about closing your credit account, that’s okay. There are options for you to take. You just have to identify why you want to close it in the first place.
If you want to get rid of the high interest and fees
According to reports, the annual fees have steadily risen over the years. In fact, the annual fee revenue during the first quarter of 2018 reached $1 billion. That is a lot of money that could have been used by the average consumer to save or invest. If this is the reason why you want to close the credit account, why not talk to your creditor instead? Ask them to lower or waive the fees so you don’t have to close it.
If you want to get rid of a secured card
There are creditors who are willing to convert your secured card into an unsecured one. If you need the deposit but you still need the card, then don’t close it. Just ask the creditor to convert it into an unsecured credit card. This is better than opening an account and building a credit history from nothing again.
If you don’t want to max out the card again
If you are scared of reaching the credit limit again, you can make it less destructive. Call the creditor and ask them to lower the credit limit. That way, if you reach the limit, it will not be too much. And it will also not affect your credit utilization rate that much.
Of course, that is the easy way to solve it. What you really must do is to learn how NOT to max out your credit cards. In the end, it will not matter how many credit cards you own. If you know how to manage it well, you can avoid the threat of too much debt.