If you have a credit card with a zero balance, should you close it? Would cancelling it improve or harm your credit score? This is important to get right if you are trying to clear your debts as fast as possible or if you are hoping to get a mortgage soon. Here are the main arguments for and against closing the credit card:
No simple answer
There are five arguments for and five 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 not like you to 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 “credit score” that Experian or the other credit reference agencies calculate. Obviously if you next apply for a £30/month mobile contract the lender isn’t going to be as fussy as if you want a £180,000 mortgage. The lender’s decision will depend on:
- what you put on your application form (for example your income, why you want the loan);
- your past history with that lender;
- your credit report; and
- their own lending policy.
Which points matter most for you?
It’s not possible to give a simple Yes or No to cancelling your credit card with a zero balance. But some of those ten reasons will matter more than others for you. First the “Yes, close it” points:
- You won’t be tempted to use it. This is a probably the most important of all the points! 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. Unless you have a great track record with money in the past, it’s probably best to remove the possible temptation.
- Lenders don’t like too much available credit. This is a matter of balance. If you have been sensibly paying off your 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 problem debts again by cancelling most of the cleared cards.
- It shows good credit management. Having a “settled” account, where you borrowed money, repaid it and closed the account is a signal that you have managed the borrowing well. I would guess this is normally a pretty small factor for a future lender, especially if you already have some settled accounts.
- Eliminates any chance of fraud. If you close the account, there is no chance of anyone else getting hold of your post with a credit card statement in it, or even a replacement card. Of course you can stop fraud by checking your accounts regularily, but you might like to take the easy route and simply prevent the problem.
- May get a good balance transfer offer from lender. This refers to getting an offer from the same creditor as the card you are thinking of closing. There are two ways this can work. First 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 happen all the time, but when it does it’s a great way to speed up your debt repayments. Second, sometimes good offers aren’t available to existing account holders, so by closing the account now, you could make it possible to get a balance transfer offer from that lender in six months or a year.
Next, the “No, keep it open!” points:
- Keep it unused for an emergency. Everyone needs access to some emergency money and keeping an unused credit card is one option. If you already have a small savings pot, or perhaps a few hundred premium bonds or another credit card with availible credit, this reason is probably irrelevant.
- Less need for new credit applications. If you think you are going to need credit next year, then 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 later.
- Limits over £5,000 are good for your credit score. But it only adds 20 points (see How much will my credit score change if… ?) co this is very minor.
- Having accounts for a long time can look good. Lenders like to see evidence of stability, so a higher average age of accounts looks better than having a lot of accounts you have recently opened. Again this won’t often be very important. If you have two cleared cards and want to keep one open and close the other, if they both have the same interest rate, you may as well keep the older account, but the effect is small – only an extra 20 points for an account over five years old.
- 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.
If I had to make a general rule…
I think most people probably ought to close that cleared credit card. To me removing the temptation to spend on the card again and the small chance of getting a 0% offer feel like they will usually be the most important factors. But you know your own situation best!