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Episode 3008:
Sam from Financial Samurai explores the consequences of closing credit cards, sharing personal insights and practical advice to safeguard your credit score and financial health. By understanding key factors like credit history, credit line usage, and account management, you can make informed decisions about whether to keep or close your credit cards.
Read along with the original article(s) here: https://www.financialsamurai.com/should-i-close-out-my-credit-cards/
Quotes to ponder:
"To build a good credit score, you need to prove you can handle credit!"
"If a credit card doesn’t have an annual fee, I see little reason to close it unless, of course, you think it will tempt you to overspend."
"Work on kicking your addictive habits first, before using a credit card."
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[00:00:49] This is Optimal Finance Daily. Should I Have Closed My Credit Cards by Sam of FinancialSamurai.com Are you wondering, should I have closed my credit cards? By closing your credit cards, you may negatively affect your credit score. Let's discuss more in this post I wrote after I closed my credit cards.
[00:01:10] I did some spring cleaning the other day and found two credit cards in my drawer, which I totally forgot I had. One was a Home Depot credit card I got three years ago at the checkout counter because I could save 15% off my $3,000 purchase immediately.
[00:01:25] The other card was a Banana Republic credit card that I applied for also three years ago to save 10% off my $1,300 purchase of a couple new suits, shirts, and shoes. Both cards have zero balances and neither have been used since the initial purchase. My first reaction was, I should have closed these credit cards three years ago. It's not worth having credit cards lying around that aren't being used.
[00:01:49] I don't want to risk someone getting a hold of them and going crazy buying Brazilian rosewood floors at Home Depot or alligator shoes at Banana Republic or something. In essence, I wanted peace of mind and so I closed both credit cards. To my surprise, I didn't get a hard sell to leave them open. I pressed several buttons on my cell phone and both cards are now shut down. Ah, so nice to not have to worry and have less potential holes to leak wealth. I felt good that I closed my credit cards.
[00:02:18] Should I have closed my credit cards? It was only after I closed my credit cards that I began to wonder what effect it would have on my credit score and other negative repercussions. You may have some of these same thoughts too, so here are some tips before you close them. Number one, if the card is your only credit card, you probably don't want to cancel it. To build a good credit score, you need to prove you can handle credit.
[00:02:44] Hence, even if you never use your credit card and hate credit, you should have one credit card open and never close it. Number two, if the card has a long credit history, think twice before closing it. Your credit score is also based on your credit history, meaning a 20-year history of paying off your account is worth more than a two-year history. If the card is your oldest card, keep it.
[00:03:08] Number three, if the card has a large credit line compared to your overall credit, think thrice about closing it. If your overall access to credit is $15,000 between three cards and one card has $10,000 of credit, you should probably think about closing the other two cards before your main credit line card. Number four, if your card's rate is lower than the rest, keep it.
[00:03:34] The two credit cards I closed probably had a rate of 20% or more because they're merchant credit cards. Nobody should be stupid enough to use those cards and not pay them off in the first billing cycle. Number five, if your card is tied to multiple payment accounts, you may want to reconsider. Imagine if a card is tied to your Amazon account, fitness club account, car insurance account, and home alarm bill. What a pain in the butt to close and refill out all those forms.
[00:04:02] Credit cards aren't for everyone. Important. If you have addictive tendencies such as gambling, smoking, overeating, cheating, and so forth, you probably don't want to have more than one credit card or even one credit card, period. It's important to know thyself and figure out whether you can handle paying for things on credit and paying off the balance every month. Work on kicking your addictive habits first before using a credit card. Credit cards aren't for everyone.
[00:04:32] Open up store credit cards to save money. If I spend more than $1,500 and there's a 10% savings at checkout, I probably will spend five minutes to fill out a form for a store credit card. Call me a sucker for saving money. But that's what I like to do on things I plan on purchasing anyway. I don't go shopping much at all, but when I do, I'm willing to do a lot to reduce my bill. Furthermore, I always pay off the bill in the first billing cycle or before the 0% interest rate ends.
[00:05:00] To do otherwise is just illogical. I have worried about how opening up new lines of credit affects my credit score, but I've stopped worrying. First of all, the credit lines are so small compared to my overall credit that it doesn't make a difference. I always pay off the bill in full so it doesn't negatively affect my score. And finally, there's no point in overly worrying about your credit score if you consistently pay your bills on time.
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[00:06:40] If a credit card doesn't have an annual fee, I see little reason to close it, unless of course you think it will tempt you to overspend. And even if it does have a fee, you can call and have your card downgraded to an option with no annual fees and then leave it open. I don't worry too much about fraud because I regularly monitor all my accounts to make sure I don't see anything fishy going on. I typically use one or two cards at a time, though I have many open lines of credit.
[00:07:10] I keep an eye out for fraud by reviewing the charges on the cards I'm actively using monthly. And then all the other cards with zero balances are captured in my personal capital account. Personal capital is a free service that you can use to track your net worth. And it does this by connecting to all your different bank accounts, open lines of credit and investments. So if I see that there's a balance on a card I don't use as a part of my regular personal capital review, it would prompt me to investigate further.
[00:07:40] Another thing I do is review my credit report yearly to make sure I recognize all the open lines of credit. Sam mentions that if the card has a high interest rate, you should consider closing it. However, I'd like to point out that if you're strategically playing the credit card game, you should be paying your balances in full every month. Interest rates shouldn't matter because you're not planning to pay any interest, right? And that will do it for today. Have a great day and start to your weekend if you're listening in real time.
[00:08:09] And I'll be back here over the weekend where optimal life awaits. I'll be back here.