Ask Money

Closing credit card accounts–again

Chris Farrell Dec 22, 2009

Question: I just got my first notice from a credit card that my interest rate is going up … to over 20%! It’s a card I haven’t used in years and don’t intend to, but I’ve not closed it because of the negative consequences to my credit that would surely result. Truthfully, I have a few cards like that, having done the balance transfer thing and such over the years, but I now have no balance on any of them, and I’m afraid they are all going to increase the interest rates soon.

I have never paid any bill late, am currently paying two car notes and a mortgage and student loans without any problem. While I know that it would probably be good for me to make an occasional charge on these cards, I really have no desire to do any more keeping up with bills and payments, etc. Life is complicated enough already!

My question is, what will do the most damage to my credit rating: having high-interest accounts open (with zero balances) or cancelling those accounts? I would love to just get rid of these things, but sure don’t want to make any mistakes when things have been going well for so long. Thanks! Liz, Westbrook, ME

Answer: I think variations on your issue are the main one personal finance questions we’ve dealt with this year. Yours will be the last I take in 2009, although I have a feeling the issue won’t go away in 2010. Credit card companies are hurting financially. They have a deeply flawed business model. To shore up profits they are hiking rates, raising fees, closing accounts, and slashing credit limits on many good and not so good customers. It’s bad business. It’s intriguing to note that last year debit card usage surpassed credits cards for the first time and the trend has continued this year.

Now, the higher interest rates on your credit cards won’t have an impact on you. For one thing, you aren’t carrying any debt. So it doesn’t matter if the rate is 0%, 6%% or 20%. (However, I hope you’re not paying fees on these credit cards you aren’t using.) For another, the credit card interest rate doesn’t affect your credit score.

Closing the accounts could have a slight negative effect on your credit score. The impact comes from an overall lower credit limit.

My response to that credit score nick is this: So what? The drop in your credit score–assuming it even happens–doesn’t really matter unless you’re in the market right now to buy a home, a car, or some other big ticket item that you need to borrow some money to own. If that’s the case, keeps the accounts open and your credit score pristine. But if you aren’t in the market to borrow why not get rid of the cards you don’t need. It’s common financial sense.

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