September 6, 2023

Close a Credit Card or keep it open with a Zero Balance? What is the right choice?

Is it wiser to close a credit card or maintain it with a zero balance? Learn the impact on credit scores and financial habits, and get insights backed by research.‍

In the realm of personal finance, a common question often arises: Should you close a credit card account or retain it with a zero balance? This seemingly straightforward inquiry delves into a complex web of financial considerations, each bearing potential consequences for your credit score, financial habits, and overall financial well-being. To shed light on this matter, let's explore the dynamics between closing a credit card and maintaining it at a zero balance, backed by insightful statistics.

Your credit score, a crucial indicator of your creditworthiness, significantly impacts your finances. Approximately 90% of top lenders use the FICO credit score to make lending decisions, making it vital to understand how your credit card decisions affect this score. A substantial portion of your credit score depends on your credit utilization ratio – the amount of credit you use compared to your total credit limit. Closing a credit card may inadvertently increase this ratio if you carry balances on other cards, potentially harming your credit score.

Statistics show that credit utilization contributes to about 30% of your FICO credit score, underlining the weight this factor carries. On the flip side, maintaining an open credit card with a zero balance can bolster your credit utilization ratio positively. This strategy is especially crucial, considering over one-third of Americans don't know that high credit card balances can damage their credit scores, according to a recent survey.

As you navigate the intricate decision of whether to close a credit card or leave it open, it's imperative to recognize the multifaceted nature of personal finance. This article delves into the advantages and drawbacks of each choice, helping you make an informed decision that harmonizes with your financial goals.

Read more: Closing a Credit Card? When Should You Do?

The Credit Score Conundrum

One of the primary concerns when it comes to managing credit cards is their impact on your credit score. The credit score, often calculated using algorithms like FICO or VantageScore, serves as a numerical representation of your creditworthiness. Various factors influence your credit score, and the presence of open credit cards can significantly affect this metric.

Closing a credit card may seem like a straightforward solution to reducing the temptation of overspending and streamlining your financial obligations. However, this action can have unintended consequences on your credit score. A significant portion of your credit score is determined by your credit utilization ratio – the amount of credit you're using compared to your total available credit.

By closing a credit card, you potentially decrease your total available credit, which can raise your credit utilization ratio if you maintain similar balances on your remaining cards. A higher credit utilization ratio could negatively impact your credit score, as it might signal a higher risk of default to lenders.

On the other hand, keeping a credit card open with a zero balance contributes positively to your credit utilization ratio. If the card has a substantial credit limit and you consistently maintain a low or zero balance, this can potentially enhance your credit score by demonstrating responsible credit management. Additionally, the length of your credit history plays a role in your credit score. Closing your oldest credit card could shorten your credit history, potentially lowering your score.[1]

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The Benefits of Closing a Credit Card

While maintaining open credit cards can have potential benefits for your credit score, there are valid reasons to consider closing a credit card account as well. One primary advantage is the elimination of temptation. If you find that having access to multiple credit cards encourages impulsive spending and debt accumulation, closing an unnecessary account could be a prudent decision. Simplifying your financial landscape by reducing the number of accounts can also make it easier to manage your finances effectively.

Furthermore, closing a credit card can shield you from potential security risks. The more credit cards you possess, the higher the chances of one being lost or stolen, potentially leading to fraudulent charges and identity theft. By narrowing down the number of active credit cards, you decrease your exposure to such risks and can focus on monitoring a smaller set of accounts more closely.[2]

The Advantages of Keeping a Credit Card Open

Deciding to keep a credit card open, even with a zero balance, can offer several advantages, particularly if it's a card with a favorable credit history. As mentioned earlier, the length of your credit history plays a role in determining your credit score. An older credit card account demonstrates a longer credit history, which can positively influence your credit score over time. Therefore, maintaining an older card with a zero balance showcases responsible credit management and contributes to the overall health of your credit profile.

Additionally, open credit card accounts can be useful in emergencies. Unexpected expenses, such as medical bills or car repairs, can arise at any time. Having an available line of credit can provide a safety net to cover these costs without resorting to high-interest loans or depleting your savings. A zero balance on the card ensures that you won't accrue interest charges as long as you pay off the balance promptly when used.[3]

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The Alternative Solutions to Closing Your Credit Card

If you're torn between closing a credit card and keeping it open with a zero balance, there are alternative solutions to consider:

  • Limited Usage: Instead of closing the card, restrict its use to occasional or emergency purchases. This way, you maintain its benefits without succumbing to impulsive spending.
  • Automate Payments: Set up automatic payments for recurring bills on the card and ensure that the balance is paid in full each month. This demonstrates responsible credit usage and prevents the accumulation of high-interest debt.
  • Monitor Regularly: Keep a close eye on your credit card statements and credit reports to detect any unauthorized activity promptly. This proactive approach can help you address any potential issues swiftly.
  • Review Benefits: Evaluate the benefits and rewards associated with the card. If the card offers valuable perks like cashback, travel rewards, or purchase protection, keeping it open might be worth it, even with minimal usage.[4]

Strategic Considerations

The decision to close a credit card or leave it open with a zero balance isn't solely dictated by your credit score. Your personal financial situation, goals, and preferences should play a pivotal role in your choice.

1. Assess Your Financial Habits: Consider your spending patterns and self-discipline. If you tend to overspend when multiple credit cards are available, closing an unnecessary card might help you better control your finances.

2. Evaluate Fees and Rewards: Some credit cards come with annual fees. If the card you're considering closing has an annual fee that outweighs the benefits it offers, it might make sense to close the account. Conversely, if the card offers attractive rewards, keeping it open – even with a zero balance – could be worthwhile.

3. Plan for Big Purchases: If you're planning to make a major purchase, such as a home or a car, in the near future, it's wise to maintain a healthy credit score. In this case, keeping a credit card open with a zero balance can contribute positively to your credit utilization ratio and overall creditworthiness.

4. Credit Mix: Your credit mix, which refers to the types of credit you have (e.g., credit cards, loans, mortgages), also impacts your credit score. Closing a credit card might affect this mix, potentially influencing your credit score.

5. Closing Accounts Responsibly: If you decide to close a credit card, do so responsibly. Pay off any outstanding balances, notify the card issuer of your intention to close the account, and request written confirmation that the account has been closed at your request. This can help prevent any misunderstandings or potential issues in the future.

6. Monitor Your Credit: Regularly monitor your credit reports to ensure accuracy and detect any unauthorized activity. Services like Credit Karma or allow you to access your credit reports for free.[4]

Close a Credit Card or keep it open with a Zero Balance? What is the right choice? Know right with Bright

Psychological Impact of Closing a Credit Card

Beyond the practical considerations, there's an emotional aspect to the decision of closing a credit card or leaving it open. For many individuals, credit cards can carry sentimental value, representing significant life moments or achievements. Closing a credit card that has been with you for a long time might feel like severing a connection to your past.

Moreover, credit cards can evoke a sense of security since knowing you have access to credit in case of emergencies can provide peace of mind. Closing a credit card could potentially create anxiety if you fear being caught without a financial safety net. It's essential to acknowledge and address these emotional attachments when making your decision.[5]

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Navigating the Balance Transfer Option

If the primary reason you're considering closing a credit card is to escape high interest rates or unfavorable terms, a viable alternative could be a balance transfer. A balance transfer involves moving your existing credit card debt to another card, often one with a lower interest rate or a promotional period of zero interest. This strategy can save you money on interest payments and help you pay off your debt more efficiently.

However, balance transfers should be approached with caution. Many balance transfer offers come with fees, and if you're not disciplined about paying off the transferred balance within the promotional period, you could end up with even higher debt due to interest rates reverting to normal. Nonetheless, if handled prudently, a balance transfer can allow you to keep your existing credit card open while still addressing financial concerns.[6]

Read more: How do credit card balance transfers work?

Impact on Future Credit Applications

Another consideration is how closing a credit card might affect your future credit applications. When you apply for credit, lenders often evaluate your credit history and utilization to determine your eligibility and terms. If you have a long-standing credit card with a positive credit history that you decide to close, you could potentially reduce the positive information available to future lenders. This has the potential to negatively impact your credit score in the short as well as long run.

It's also worth noting that closing a credit card doesn't erase its history from your credit report. Positive account information typically remains on your report for up to 10 years after the account is closed. Therefore, even if you close an account, its positive impact on your credit history can remain intact for a significant duration.[7]

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The Verdict

In the debate between closing a credit card or leaving it open with a zero balance, there's no universal answer. Your decision should be guided by a comprehensive evaluation of your financial situation, goals, habits, and emotional attachments. You must also consider factors such as:

  1. High APR
  2. High annual fees
  3. Low credit limit
  4. High inactivity fee
  5. Unused rewards
  6. Poor customer service
  7. Lack of benefits

If more than four out of the listed seven factors apply to your credit card, then it may be the right move for you to close the card. However, if fewer than four factors are applicable, it may be worth considering other options like keeping your credit card open with minimum balance, before you decide to close the card.

Before taking action, it's also advisable to consult with financial advisors or credit experts who can provide personalized insights based on your circumstances. Ultimately, the key lies in finding a balance that aligns with your short-term and long-term financial aspirations, supports responsible credit management, and contributes positively to your overall financial well-being.

Whether you choose to close a credit card, keep it open with a zero balance, or opt for a compromise solution, the decision will have far reaching consequences and significantly impact your credit score, especially in the short run. Make the right choice timely to seamlessly solidify your financial future.

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  1. Will closing a credit card improve my credit score?

Closing a credit card might not necessarily improve your credit score, and in some cases, it could even have a negative impact. Your credit score considers various factors, including credit utilization and credit history length. Closing a card might lower your available credit and increase your credit utilization ratio, potentially leading to a lower score.

  1. How does closing a card affect my credit history?

Closing a credit card can impact the length of your credit history, an important factor in your credit score calculation. If you close your oldest credit card, it could shorten your credit history and potentially lower your score. This is because longer credit history is generally seen as positive by credit scoring models.

  1. What's the role of credit utilization in credit scores?

Credit utilization, or the ratio of your credit card balances to your credit limits, plays a significant role in credit scores. A lower credit utilization ratio is generally favorable for your score, as it suggests responsible credit usage. Keeping a credit card open with a zero balance can contribute to lower credit utilization, which may positively impact your score.

  1. Can an unused credit card affect my finances?

Even if you're not using a credit card, it can have an impact on your financial situation. Some credit cards come with annual fees, and having too many unused cards can be overwhelming to manage. It's important to weigh the benefits, costs, and potential risks associated with keeping an unused credit card open.

  1. What should I consider before closing a credit card?

Before closing a credit card, consider factors such as your credit utilization, credit history, potential impact on credit mix, annual fees, and emotional attachment to the card. If the card has a favorable credit history and benefits, you might want to keep it open, even with a zero balance. It's crucial to evaluate how the decision aligns with your financial goals and overall strategy.

Abhishek Raj
Technical Content Writer
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