Should I close my credit card?

by Wade Barnes 24. February 2010

There has been a lot of discussion this week revolving around the Credit Card reformation act that became effective this week (If you missed the conversation, check out the Credit Legislation post for details).   A result of the proposed legislation was a knee jerk reaction by the credit card companies to raise rates across the board to all of their customers, as future rate hikes will be regulated a bit more aggressively.  Over the past few months, many good customers whose rates have been hiked now feel slighted and want to close their account with their credit card holder.  By all means, if you feel so strongly don’t let me discourage you from acting.  On the flip side, this same legislation has unintentionally made credit harder to come by (and likely more expensive), so you may want to consider this before axing your old account.  On top of this, think through what affects this may have on your credit rating.

I had lunch with a friend a few weeks ago who is an executive at a local business.  He has never been late on his payments, never gone over his credit limit, has excellent credit, a stable job with a solid income but was still a victim of blanket rate increases by his unnamed credit card company.  Out of frustration, he wanted to close this account that has been opened for over 20 years.

The reality of it is, my friend never carries a balance on their card and hence is never affected by the associated interest rate.  Even if a balance was carried from month to month, I’d check out the competition’s rate before moving a balance as the grass isn’t always greener.

On to the core issue: If they close their credit card, an account with an excellent history, their credit score will take an immediate hit – especially if they open a new card in its place.  Not only would they close a beneficial account in their credit history, they would also reduce the available credit limit, which could affect the credit usage ratio (the amount of revolving credit outstanding / the total credit limit).  So, there are two factors that could possibly affect your credit score by closing an account with a solid history to keep in mind before jumping ship.  Keep in mind though, with a stable credit rating, even this minor hit won't affect your overall rating in the long-term and shouldn't be of great concern but there are consequences to every action that should be considered before making any financial decision.

For more information on how credit scores are calculated and factors that affect your score, check out the post on maintaining credit ratings during tough times or feel free to be in touch for more information

As always, I welcome questions and conversations about situations you may have encountered and how these recent changes have affected you.

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