Ask Kim
Close a Credit-Card Account to Avoid Fees?
You might have to pay if you don't use your card, but you could hurt your credit score if you close the account.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
February 22, 2010
Thank you for your More Credit-Card Fees Coming article. I have several cards that I don’t use, and I worry that I could get hit with inactivity fees and other new fees if the card companies look for ways to make money in reaction to the new credit-card law. It seems as though it would be better to close the credit-card accounts rather than have to pay the fees, but I’ve heard that doing so can hurt your credit score. Sounds like a Catch-22. What should I do?
You’re right -- that’s a tough situation. You want to avoid paying inactivity fees or annual fees on cards you don’t use, but closing credit-card accounts can hurt your credit score. If you’re careful, however, you can get rid of those expensive cards you don’t use while minimizing the impact on your score.
Closing credit-card accounts can lower your score because of the impact on your credit-utilization ratio, which is the total of your card balances divided by the credit limits on all of your cards. If you close cards you haven’t used in a while but don’t pay down the balances on your other cards, your score could drop because your total balance will account for a higher percentage of your overall credit limit.
The impact on your score depends on how much your utilization rises. If your utilization ratio goes from, say, 7% to 15%, then your score will go down a modest amount, says John Ulzheimer, president of consumer education for Credit.com. But if it goes from 7% to 85%, then a score in the 800s could drop into the low 700s or high 600s, he says.
The best strategy is to pay down your balances before closing any card accounts so that you minimize the impact on your credit score. “A better long-term approach is to keep credit-card balances low as a matter of habit,” says Craig Watts, of FICO, the company that created the credit score most lenders use. Ulzheimer recommends keeping your balances to less than 10% of your available credit starting three to six months before you apply for a mortgage or other loan.
Keep in mind that it's the total amount you've charged that counts for your credit score, whether or not you pay the bill in full each month. For more information about improving your credit score, see Demystifying Your Credit Score.
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Reader Comments (14)
Posted by: Rene Del Valle at 02/22/2010 04:24:03 PM
Its amazing that the credit rating system essentially punishes you for being responsible and prudent. We are held hostage by the credit scoring system because we are so afraid to actually close a card that we no longer use, is charging us fees for not being used, and poses a risk by having this card active. I was one of those fearful ones, and I believe finance advisors should take quit telling people to figure out ways to keep these cards open and just do it. Go on the cash system and tell these credit cards to take a hike.
Posted by: Doris P. at 02/22/2010 04:58:48 PM
Hello Kimberly! I have been charging my daughter's tuition for college on my Chase card to take advantage of the 1% cash back feature. My credit limit on the card is $9900 and the tuition is $9400, which is always paid off in full before the next billing cycle. Am I hurting my credit score by doing this? Last time I applied to refinance my home, my credit score was 805 and I would surely like to keep that score. Thank for your suggestions. Doris
Posted by: Jim at 02/22/2010 05:51:34 PM
What if I do not have a balance on any credit cards that I have? Will closing them hurt my credit score?
Posted by: Valree at 02/22/2010 09:35:23 PM
All of this is nonsense...The government continues to allow the credit card companies to do as they please. If it is not one deal, it is another. The fact is this. If you carry balances and pay on them monthly, they fear you will stop paying and lower the amount you can charge. It does not matter whether you have years of good payments....
Posted by: Ruth at 02/23/2010 10:41:17 AM
...Can you use the interest you paid on a car and the interest you paid on a camper on your tax return?
Posted by: karyn at 02/23/2010 01:37:11 PM
I have credit card companies offering me a reduced 9 month payment, removing late fees and finance charges at a reduced interest rate. Then after 9 months goes back to the same plan. I don't understand the game. the payment is so low like $37.00 on a $4,000 + balance would only pay down my balance around $300.00 whats the catch?
Posted by: Crusher at 02/23/2010 09:21:08 PM
People need to get out of credit cards and go debit cards....When some card company plays games like this you chop up the card and send it to them in pieces. As long as consumers roll over and play dead (they) will keep sticking it to you. Consumers just don't realize how much power they have by CLOSING THEIR WALLETS. They suck in all the marketing hype and start to believe these companies are the almighty, but all this power you give them starts from your wallet.
Posted by: Ron Reuben at 02/24/2010 04:16:55 AM
I bought my dream car early last Dec, a 2010 Cadillac SRX (listed in your March 2010 auto roundup article), that has since turned into a nightmare with three occurences of the same issue (a dead battery), one resulting in a transmission failure as well. In about 10 weeks of ownership, the car will have been in for repairs 3 times, totaling 7 days in the shop. What can I do to prevent my $40K+ purchase from becoming a $40K+ nightmare?
Posted by: Fitz at 02/24/2010 08:32:46 AM
Pay off the cards, close the ones that threaten to charge. Don't worry about the b.s. hit (to) the credit score. Less debt is the key. Don't let the "fake" fear of a credit score number keep you with the cards - it's a mind game.
Posted by: drklassen at 02/24/2010 01:34:50 PM
Why are these credit reporting agencies even allowed to exist?! At the very least they should be HIGHLY regulated: any request for your info must be approved by you, they must give you a copy of each report they send out to others, any errors reported are their onus to fix—if they can't confirm something as true they must remove it.
Posted by: mskarol at 02/24/2010 04:13:06 PM
Credit card companies are cancelling inactive cards without notice to the credit card holders. A credit card that I had since 1972 (and used periodically over the years) was cancelled for inactivity, as were about half a dozen others. Most of them were formerly from MBNA that were transferred to Bank of America. My credit score is excellent - and there were no balances due on the cards when they were cancelled. I think that if someone were to charge a small amount (I charged under $2 on one card to keep it active) on a card that it would be considered active. That way the inactivity fees can be avoided without risking the cancellation of a card. A minimum charge might be required in the future, but I have not yet seen any indication of that - so far. Most banks provide for online banking so that the credit card charges can be paid online so that postage charges can be avoided. Had Bank of America notified me that it was going to cancel the cards if I didn't use them, I would have used a few of them. Credit cards have risen to the level of necessities. It would be too risky to carry checks (which could lead to identity theft) or a lot of cash (which can be stolen without recourse), and online purchases would be difficult (if not impossible in some cases) without credit cards. They are required for all kinds of deposits on products and services. You can cancel a charge for a product or service that you pay for and not receive. Plus, there are rewards for using some of them. Credit scores (according to TransUnion) are lowered by not having enough available credit. I don't know how much is enough, but if you use too high a percentage of your available credit, your score is not as high as it could be. Since credit scores are used for so much these days (including, by some companies, the chances for employment), it is important to keep it as high as reasonably possible.
Posted by: Frank at 02/24/2010 10:27:09 PM
What If I'm told that I can keep my card if the issuer says I must charge at least $1200 on it?...
Posted by: judith r. at 03/08/2010 03:20:02 PM
I am considering contacting a advertized credit card debt reduction company. What advice would give me regarding this action and are they capable of reducing one's credit card debt a substantial amount. How do they charge for this service? Thank you
Posted by: June Tapio at 04/07/2010 01:12:20 PM
My question is the same as one asked recently ..I am considering contacting a advertised credit card debt reduction company. What advice would give me regarding this action and are they capable of reducing one's credit card debt a substantial amount? How do they charge for this service? Please give me advice on this asap as I am having to do something to reduce monthly payments. Thank you