Want to Close that Credit Card Account? Not So Fast!

One of the common financial goals many consumers have is to get rid of their credit card debt. This is a good goal to have, but it’s important not to take it too far.

The temptation, when you pay off a credit card, is to close the account. That way you aren’t tempted to charge more to the account. However, before you decide to close your credit card account, it makes sense to stop and think through the consequences. Sometimes, it just doesn’t make sense to get rid of your credit card.

Related: Don’t Let Credit Cards Rule Your Life

Closing Your Card Account Impacts Your Credit Score

You should understand that closing your credit card account has a very real impact on your credit score. Closing an account can ding your score a little bit, but that’s not where the real impact comes in.

Instead, the more indirect consequences of closing your credit card account are likely to cause more problems with your credit score. There are two main issues that arise when you close a credit card after you pay it off:

  1. Credit Utilization: The second-most important factor influencing your credit score is how much of your available credit you are using. When you pay off a credit card, all of a sudden you are using less of your available credit. This is good for your credit score. Unfortunately, if cancel that credit card right after paying it off, you lose all that positive impact. Now it looks as though you are using more of your available credit, since all you have left are cards that you haven’t paid off yet.

  2. Credit History: To a lesser degree, your credit score is impacted by the length of your credit history. Having an open account contributes to the average length of your credit history. Once you close that account, though, the story changes and your history looks much shorter than it is.

Both of these issues, combined, can have a slightly bigger impact on your credit score that you might think. While closing your credit card account probably won’t destroy your credit rating, the reality is that it will have an impact, and you need to be aware of that.

Waiting to Close Your Accounts

Instead of closing a credit card account once you pay it off, consider waiting. You can freeze the card in a block of ice, or hide it away somewhere so that you don’t use it. Keeping the accounts open while you continue to pay down your debt can help you maintain your credit score. Once the debt is all paid off, you can evaluate which accounts to close, and which to keep open, considering the credit limit and how long you have had the account.

The Importance of Reading Rewards Program Fine Print

When you sign up for a rewards card, your first instinct usually isn’t to read the fine print. Instead, you are far more likely to pay attention to the benefits listed in the bigger print. However, at some point you need to read the fine print so that you understand the limitations associated with your rewards program.

Before you get too excited about the latest credit card rewards program, here are some of the details you should pay attention to:

Blackout Dates and Seat Restrictions

While many credit cards are doing away with blackout dates and seat restrictions, there are some rewards programs that still feature them. Read the fine print to find out whether or not you can fly during peak times of the year, or during peak times of the day.

Related: Best Airline Miles Credit Cards

Another consideration is seat restrictions. You might only be able to redeem your points for certain seats, or a flight might only have a certain number of reward seats available. Once those seats are gone, you might be forced to look for another flight. These issues can mean that you might not be able to use your rewards as conveniently as you would like.

Redemption Costs

Some credit card rewards programs charge redemption costs. You might be charged $5 or some other small amount when you go to redeem. In some cases, you might be charged extra points, or a percentage of the points you are redeeming. This automatically makes your rewards a little less valuable, since there are costs associated with redeeming them. Read the fine print so that you understand this possibility.

Purchase Requirements

We all like cash bonus credit card rewards. You make certain purchases, and you get a cash bonus, or you get extra points. However, this isn’t always what it seems. You might have to wait a certain period to make sure that you aren’t returning the purchases. This is especially true with cards that offer the bonus after the “first purchase.” Until you show that you aren’t returning something, you might not get the reward.

Also, you have to pay attention to timing. If you have three months to spend $500 to get your bonus, but you return something that cost $50 within that period and forget to replace it with other spending, you might miss out because your total is actually $450. Be sure to pay attention to these little details so you don’t miss out.

Category Sign Up

Finally, realize that if you have a rotating rewards credit card, you might have to sign up for your categories each quarter. In many cases, you have between two weeks and a month to sign up. If you forget to sign up for that quarter within the time frame, you don’t get the 5% cash back bonus on the special categories. Even if you do manage to sign up late, you don’t get to make up for the time you missed.

In the end, the fine print matters. It means the difference between maximizing your rewards, and only getting access to a sub-par rewards program.