Cancel or Keep – Should You Break-up with Your Credit Card?

Cancel or Keep

Should You Break-up with Your Credit Card?

Your credit card is paid off. You owe nothing. Great feeling right! So, should you call the credit card company and close the account? Are you thinking that you don’t plan to ever use this credit card again so what is the point of keeping it open? Well, think again! Closing your credit card account can affect your credit. You don’t owe anything, but your credit card is much more than the balance that you owe on it.

If you have ever looked at your credit reports then you know that they report on how long you have had an account open and the debt-to-income. If you close your credit card account then you could lower your score because it will show that this account is no longer active and it is not a source of available credit. Not to mention that your length of credit history will also be altered.

Understanding your debt-to-income is important because it will stick with you during the duration of your credit life.  Debt-to-income is the total monthly debt that you owe divided by your gross monthly income. So far example, if you pay $1,000 a month for your mortgage, and $400 for an auto loan, and $300 for your remaining debts then your monthly debt will be $1,700.00 ($1,000 + $400 + $300 = $1,700.00). If you are bringing in a gross monthly income of $4,000.00, then your debt-to-income ratio is 42.5% ($1,700/$4,000 = 42.5%). It’s important to note that most mortgage leaders will not allow you to borrow funds from them if your debt-to-income is higher than 43%.

The best solution is to use the credit card for small purchases at least every 2 months so that it shows that the card is active. Otherwise, the credit card company could close the account because they see that you are not utilizing it and that is even worse on your credit reports. You never want the credit card company to close your account. When the time comes that a company needs to pull your credit for a loan this will show up as a negative hit on your reports regardless if you had a zero balance when they closed it. Try to purchase gas or your groceries with the credit card and just make sure you pay the balance off each month to keep it at zero and so that you will not have to pay any interest.

If you feel strongly about breaking up with your credit card then we suggest you look at your long-term and short-term goals. Are you planning on making any big purchases soon? Then we would recommend that you hold off closing the account because you have a better shot at getting approved for a loan with your debt-to-income being better with the card’s available credit. Now, if you already have everything that you need like a home and a car and don’t see yourself making any large purchases for more than 5 years then closing it probably will help put your mind to ease not having to worry about having that account. One less card that you will have to monitor. On top of that, if you credit card has an annual membership fee then you can use that money to pay down another credit card that you plan to keep.

Just remember that not all break-ups are a good thing especially when it can negatively affect you. Be proactive in your approach when figuring out what works best for you. If you have a credit card that has a high interest rate and the credit card company won’t lower it then cut them loose. No point in keeping the card if you are paying so much in interest fees to keep it.

 

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