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Think Twice Before Closing Credit Card Accounts

There are several reasons why credit card holders may want to close an account. Perhaps there is a fear of too much open credit which could carries a higher risk of identity theft or uncontrollable spending sprees. Or perhaps you want to simplify your accounts and credit report. Or perhaps, and likely one of the biggest reasons, you're sick of being jerked around by your credit card company and are ready to tell them to take a hike.

Some credit industry reps even tell their customers, "if you don't like it you're free shop around" - indicating that they are less than willing to negotiate with their customers. Credit card issuers know that consumers, especially in this economy, don't always have the luxury to shop around. And if they do, there are often consequences to follow.

Whatever your reason, you may want to consider the following ramifications before closing any accounts:

Closing accounts will most likely damage your credit score.

First; Amounts Owed is weighed heavily in score calculations; in fact it makes up 30% of your score. If the account has a balance, closing it won't make the balance automatically disappear. You will still have the same amount of debt, just not as many accounts to spread it among. You will also have less available credit compared to your total debt (credit utilization ratio) which also negatively impacts your score.

Second; Length of Credit History is also factored into the credit scoring formula; 15% to be precise. If the account in question has been open and active for a long time, closing it would certainly damage your credit score.

You may have difficulty getting new, let alone better, credit.

First; decrease in available new credit. You have likely seen a dramatic decrease in the number of credit card offers you receive. That's because creditors have over-extended themselves and are facing record-high delinquencies. They simply can't afford to offer credit like they used to, especially with the new restrictions placed on them. They stand much more to lose than to gain with the current market. So, shopping around isn't really an option for many consumers.

Second; low credit scores will result in higher rates or denial. Consumers' credit scores have taken a real hit during the recent economic crisis which has made it even harder to get prime, or even affordable, rates on credit. Lenders used to consider a 720 score as the qualifier for the best rates, but with the high number of delinquencies, 740 is the new standard. The further you are away from 740, the higher the interest rate. If you are too far, you won't qualify for any credit. Many consumers are just better off sticking with their current creditors, despite belligerent actions.

Other reasons why not to close an account

There are some other issues you'll want to consider before closing an account:
  • You are in the market for a major loan. If you are planning on getting a mortgage or auto loan don't do anything to stir up your credit report. You'll need all the points you can get if you want good rates and terms. If you want to close an account, wait until after the loan has closed.
  • You are trying to raise your credit score. If you are working on improving your credit, whether new or tarnished, open and active credit accounts are one of the best ways to do it; the older the better too. Wait until you are at least in the 700s - better yet 740 - before closing any accounts.
  • You have only one or two credit cards. Closing an account in this case may dramatically alter your credit utilization ratio, which is the credit you're using compared with your open, available credit limits. Reducing that gap by too much can really hurt your score. If you are in this situation but still feel strongly about closing an account, consider opening another account before you get rid of the existing one.

When it's safe to close an account

If you feel that you are being taken advantage of by a credit card issuer or you simply want to reduce the amount of open credit in your name, it is okay to close an account under the following conditions:

  • You have a good credit score (preferably 740 or above)
  • You have at least two other revolving credit accounts
  • You are not seeking new credit; especially a mortgage or car loan.

In these instances, closing a single account will impact your score very little, if at all.

When you are ready to close an account

If you have decided to close an account because of unfavorable rates and terms, give the issuer one last chance to improve conditions. Be prepared with other legitimate offers which may help persuade. If the issuer won't budge or agree to a satisfactory rate and/or terms, tell them you want to close your account.

Make sure to put your request in writing. Write a letter to the issuer stating precisely why you closed the account. Send it to the address listed on the back of your statement. If you want to send a stronger message, send a copy of the letter to the card issuer's chief executive. They deserve to hear first hand from their unhappy customers. If enough of their good customers walk away, issuers may get the message that consumers aren't going to put up with unfair tactics.