If you have a credit card or catalogue account with a zero balance, should you close it?
You may be worried if this would help or harm your credit score. But that isn’t the only thing to consider. And what impact will it have on a mortgage application – cr4edit scores aren’t the only that matters to a mortgage lender.
This decision is important to get right if you are trying to clear your debts as fast as possible.
Here are the main arguments for and against closing the credit card:
Four reasons to close that card
1. You won’t be tempted to use it
For many people this will be the most important point of all.
Getting a consolidation loan and not closing down all the credit cards you have paid off can end up in a disaster in a year or two if you go on to run up the card balances. You then have high credit card bills and still have most of the consolidation loan to pay off.
Unless you have a great track record with money in the past, it’s probably best to remove the possible temptation.
2. Lenders don’t like too much available credit
This is a matter of balance. If you have been clearing debt as fast as possible, perhaps so you can get a mortgage, you can show a future lender you aren’t going to run up huge debts again by cancelling most of the cleared cards.
It’s a good idea to keep one for an emergency. See below for how to decide which one!
But if you were thinking it would be a good idea to keep them all open so you can then use them for furniture, carpets, new bathroom when you have bought your house… that is exactly why a mortgage lender may be worried about you having a large about of credit available!
3. Fewer accounts keeps your finances simple
There is always some risk of fraud with open accounts. If you close the account, there is no chance of anyone else getting hold of your letters or emails with a credit card statement in it. Or of getting hold of the replacement card you will be sent when the current card comes up to the expiry date.
Of course you can stop fraud by checking your accounts regularly, but you might like to take the easy route and simply prevent the problem.
And with an open account, you will continue to get emails or letters if the lender changes the way they calculate the minimum payment or increases the interest rate. If you are like me, you don’t want to get more stuff coming through that you will just ignore.
4. 0% balance transfer offers
When you phone up to cancel the card you can say:
I would like to close this account unless you can offer me a 0% balance transfer offer.
This doesn’t work that often but if you have other credit cards that you are paying interest on, or where the current 0% period is going to be ending soon, it’s worth a try as it could really speed up your debt repayments.
Also sometimes good 0% offers aren’t available to existing account holders. So by closing the account now, you may be able to get a balance transfer offer from this lender in six months or a year.
In 2021 0% deals are getting harder to find and it will make your hunt for good deals even harder if you have to rule out some lenders because you already have an account with them that you are not using.
And four reasons to keep the card open!
1. So it’s there for an emergency
Everyone needs access to some emergency money and keeping an unused credit card is one option.
If you have another credit card with unused credit, or some savings, this reason is probably irrelevant.
2. Less need for new credit applications
If you know you are likely to need credit next year, you may decide to keep this card open, so you won’t have to make another application where you might be refused.
But credit cards are an expensive way of borrowing… You might do better to close this account now and apply for a low-cost loan or a 0% on purchases card later.
3. High limits and old accounts are good for your credit score
If your card has a limit of over £5,000, this does give your credit score a small boost – see How much will my credit score change if… ? But it’s only 20 points so it’s pretty minor.
And very small limits don’t help your credit score at all!
Lenders do like to see evidence of stability, so it’s better to have accounts with a higher average age rather than accounts which have just been opened. Again this is a pretty small effect, having a credit card for more than five years gives your score a 20 point boost with Experian.
4. Unused credit shows you aren’t struggling
This is a hard one to evaluate.
If you have maxed out several credit cards and have a high level of borrowing for you income, lenders may think you are struggling and not want to lend you more.
But if you have just cleared a credit card and closed it, a creditor will be able to see from the settled account and your credit history that the “trend” is going in the right direction. And if you have other credit cards which aren’t maxed out, there is available credit there.
What matters most for you?
So there are four arguments for and four against closing…
And to make it even harder to decide, some of them appear contradictory: how can lenders be worried if you have too much unused credit AND be worried if you have too little available credit because it means you might be in difficulty!
Another complicating factor is that each lender has their way of making a decision, they don’t use the headline credit score number that Experian, Equifax, or TransUnion calculate.
The lender’s decision will depend not just on your credit score but also on the rest of your application, for example your income and expenses, and their own lending policy. Obviously if you next apply for a £30 a month mobile contract the lender isn’t going to be as fussy as if you want a £180,000 mortgage!
One thing that is becoming clear in 2021 is that stopping using a credit card and using Buy Now Pay Later facilities such as Klarna and LayBuy instead is a bad move for your mortgage prospects.
It’s not possible to give a simple Yes or No to cancelling your credit card with a zero balance. But some of those eight reasons will matter more than others for your situation.
On balance I think most people probably ought to close a cleared account (unless it is their only available credit) because of these two factors:
- removing the temptation to spend on the card again and
- closing the card may increase your chance of getting a 0% balance transfer offer.
Which card to keep and which to close?
If you are clearing a lot of debt and you will have several cards to make this decision about, it’s probably a good idea to close all apart from one.
These are the things to think about when deciding which card to keep:
- keep a card with a low interest rate, so it’s less expensive if you need to use it in future;
- keep a card that you have had for a long while, because older accounts look good and help your credit score;
- keep an account with a credit limit of over £5,000 if you have one, as this also helps your credit score.
Updated in August 2021