Not all credit cards are keepers, but how do you know which ones to hold onto and which ones to send down the road? If your lifestyle and needs have changed are the credit cards you hold still making sense to own, are they still the right fit for you? Here are some suggestions.
1. Big Annual Fee
Is a big annual fee coming due soon on your card? This might be a good time to review the value of the card to determine whether or not to keep it or close the account. It’s important to determine whether the benefits you receive from the card outweigh its cost.
For example, you might have an airline co-branded credit card that costs $95 per year. One of the benefits is one free checked bag for each traveler flying on tickets purchased with the card. If you and your travel partner fly one round-trip each year on that airline, that’s four free checked bags (two bags each way). If the airline charges $25 for each checked bag, you’ll save $5 by paying the annual fee instead of the bag fee.
The bottom line: put a dollar value on the card’s benefits and figure out how many of those features you’ll use, and especially which hard costs you’ll incur if you don’t hold the credit card. If the fee is the greater number, and if your lifestyle has changed you may want to consider if the card is still the right one for you. You may want to switch to another card or close this one, however before you close your card it is important to know the impact closing a card can create, which we discuss at the end of this article.
Plenty of cards are available that have no annual fee especially for consumers whose credit is in the good to excellent range. Although it is important to note that credit card companies use a variety of factors, including credit score, to determine if they will approve you for one of their credit cards as well as determining the terms of their offer.
2. No Rewards or Elusive Rewards
With all of the reward cards out there for people at every level of the credit ladder, there is absolutely no reason to use a credit card that doesn’t give you something back, whether in the form of miles, points, cash back, or even statement credit towards your credit card bill.
If your card earns rewards but they’re hard to earn or hard to redeem, you may want to consider switching to a different card. Many cards have a flat-rate earning for all your purchases so you don’t have to keep up with rotating categories or spending tiers.
3. Highest Interest Rate
If you carry a balance but have other cards that carry lower interest rates, you might want to transfer the balance and close the card with the higher interest rate. The number of 0% introductory APR balance transfer offers available today is huge.
Similarly, if you took advantage of a low or 0% introductory APR offer that is about to expire, it’s time to review your cards and balances and you may want to consider ditching the worst of the bunch. Remember, though, that you’ll probably pay a fee of about 3% of the amount of each balance transfer to transfer each balance. Also, some cards treat balance transfers as cash advances, which are normally billed at an even higher interest rate. So be careful. Acquaint yourself with the terms before you move balances around.
4. Newest Card
Part of your credit score depends on the average age of all of your accounts. So even if you rarely (or never) use an old card, you might want to keep it open for the benefit of its age. If that’s the case, use the card once every few months to keep it from going dormant because some card issuers will close dormant accounts or charge an inactivity fee.
Closing a new card, however, could actually bump your credit score up a notch if it results in a higher average age for the accounts you leave open. So again, a newer card with an introductory rate that is expiring may be a candidate you consider for closure.
5. Beginner Card
If you are building or rebuilding credit, you may not have qualified for a credit card for those with excellent credit, when you first applied. You may even have a secured card. If you’ve paid your credit card bill responsibly for six months and kept balances low, and if you managed any other loan or credit accounts responsibly as well, your credit score may have improved enough to qualify for a traditional credit card that is cheaper to own and offers more benefits.
6. Costly Card
Annual fees and interest rates aren’t the only things that affect the overall cost of a credit card. If you frequently travel outside the U.S. and your credit card charges a foreign transaction fee for purchases made abroad, look for a card that doesn’t charge a foreign transaction fee. The fee is usually around 3% and can add significant expense to your purchases.
When to Avoid Closing Accounts
You may not want to close your credit card if doing so will significantly raise your debt utilization ratio (that’s the amount of debt you carry in relation to the total amount of debt available to you). If you own three credit cards with a combined credit limit of $5,000 and your balances total $2,500, your ratio is 50%. If you close an account with a $1,000 limit, your utilization goes up to 62.5% and your score could take a hit. On the other hand, if you have low-limit retail cards that you don’t use, closing them shouldn’t have a significant impact on your ratio.
If your credit card has a balance, don’t close the account before you transfer the balance to another card. If you do, your limit will be reported as zero and any balance will make the card look like it’s maxed out. If any one card is maxed out, your credit score could suffer.
If the credit card is one that you have had for a long time, you may want to think twice before closing it as the length of your credit history is another factor that affects your credit score.
View your free credit score, average account age and debt utilization ratio on Credit Sesame.
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