You will often hear that keeping credit cards open is a better bet than closing them, even if they are rarely used. The reason? Closing a credit card can damage your credit score in two ways.
First, if you are closing an account that you have had for many years, it could affect the length of your credit history. It is an important factor that goes into calculating your credit score.
Closing a credit card could also result in a lower credit limit overall. With this, you run the risk of seeing your credit utilization rate climb into unfavorable territory, which could also plunge your score.
Still, it might be a good idea to close a credit card if it comes with a high annual fee and the card no longer benefits you. And if you are going to do so, there is another key step you will need to take to avoid damaging your credit score.
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Don’t neglect your recurring bills
The great thing about credit cards is that they allow you to have recurring bills billed automatically each month. This way you don’t have to go in and pay them one by one.
Charging recurring bills on a credit card makes sense. You can earn cash back or reward points for these expenses.
But if you’re planning on closing a credit card, you’ll need to go through your statements going back at least a year and see which bills are set to be paid automatically on your account. Then you will need to transfer those bills to another credit card or have the payments sent from your bank account to cover them.
You may even decide to pay some of these bills manually until you find the best way to solve them. The key, in any case, is to make sure that these recurring payments are factored in. If you don’t and end up paying some of your late bills, it could serve as a black spot on your credit report and lower your score.
Why do you need to go through a year of credit card bills? You may have recurring expenses that only occur once a year, such as a professional license renewal. Going this far could help you avoid accidentally neglecting any of your obligations.
Should you close a free credit card?
It’s one thing to close a credit card that isn’t offering you great value and comes with an annual fee. But if there is no charge to stay on board as an account holder, you may want to consider keeping this card in a safe place and keeping it as a backup payment option. Keeping that account could help your credit score stay in solid territory.
Of course, if you keep an old credit card but just don’t use it, you’ll still have to go through your statements and transfer your recurring bills to the card you get to replace it. Another card may have a lower interest rate and a better rewards program, in which case transferring your bills is a smart move.