People ask me all the time, “Should I close my credit cards? I have too many.” Some of the reasons include:
- They facilitate excessive spending
- They’re simply not being used
- The potential for identity theft
- High interest rates
- High balances
What many people don’t realize is that closing credit cards negatively impacts your credit score. Another thing to know is that negative history stays on your credit report for seven years (10 years if it’s a bankruptcy), whether the credit card is open or not. So closing your credit cards usually causes more harm than good, and it negatively affects your debt-to-income ratio.
FICO suggests that you keep them open because the length of time you have a credit line open is factored into determining your credit history. Credit bureaus like to see old accounts, especially if you’ve been paying on time.
Another good reason to keep a card even if you don’t use it is that lenders like to see some diversity in your credit history. Even if it might make sense to do everything with one card, I recommend opening two or three others and letting them collect dust.
I have a friend who has been struggling with budgeting her whole life. Finally she decided to acknowledge that she was a hot mess when it came to self-control, and she was looking to hack her way into a more orderly life. I thought her idea was brilliant, and came up with a hack of my own: Take unneeded credit cards and put them in a bowl or a baggie filled with water, and put the bowl in the freezer. That way you can’t just grab it immediately for an impulse buy; you have access to it, but you would have to think about it before using it.
If you have a card that has high annual fees and you don’t use the card, before you close it try to negotiate a lower annual fee. If you have cards that have high interest rates and you use them a lot, it’s best to pay off the cards with the higher interest rates first. Try your best to pay them off every month in full. That way it doesn’t matter what the interest rates are.
We’re all entitled to one free credit report from each of the three credit reporting agencies every year. You can find out more information at annualcreditreport.com. I strongly encourage making use of this service, especially if you are planning on taking out a mortgage in the near future.