After you've accumulated a lot of debt, it's easy to presume that closing credit card accounts will help improve your situation. There really is such a thing as having too much borrowing capacity. The more credit cards you own, the greater the risk you have of accumulating more debt than you can handle. Lenders, especially mortgage providers, prefer prospective borrowers who have fewer credit cards because having fewer bills to pay each month means more money is available to pay loan balances. However, if you close a credit card account, you run the risk of lowering your credit score.
Consolidating Versus Closing Credit Card Accounts
If you have two or more credit card accounts and want to consolidate them, then by all means go right ahead. Simply transfer the balance from one card to the other one.
When you are consolidating credit card accounts, try to consolidate the debt onto the one with the lowest interest rate. Ideally, you would want to put the added balance on the the account you've had the longest, but if newer cards have cheaper interest rates, try calling the issuer of the oldest card account and asking for an interest rate that matches the cheapest card you have.
Once you have consolidated the balance onto one card, put the other card with the zero balance away. Don't close the account or you might run the risk of lowering your credit score. Closing credit card accounts can actually lower your credit score, even if you pay down all of the balances.
The big three credit bureaus favor people who manage credit card accounts responsibly; ideally, that's paying at least the minimum amount on time every month. Using 50 percent or more of the available credit on an account could bring down your credit score, so some people believe that retaining more than one credit card account could eliminate the problem. Actually, you're better off using cash for some purchases and paying down the balance of your credit card account than opening new cards or asking for credit limit increases to expand the amount of credit you have.
Employer Charge Cards
An important exception to the one-card-only suggestion is if you have a corporate charge card. Keeping your work spending separate from your personal charges is generally considered responsible management of credit. Make sure your employer's name is on the business charge card along with your own name.
Remember to Stop Using the Accounts
Don't make the mistake of using the accounts again and running up the balances. If you feel that you won't be able to stop using the card or if you don't want to pay an annual fee for a card that you are not using, you may decide to close the account. Call the customer service phone number for the credit card account you are closing and tell the company that you want to close the account. The card issuer might be able to grant your request over the phone, but some issuers want you to notify them in writing. Either way, calling the company will help you learn the correct protocol for closing the account. On the phone you'll also be able to find out if there's any remaining balance and arrange to pay it off.
Stick With It
Once you've consolidated your credit card accounts, stick to your resolve by not opening any new ones. The major bureaus may lower your credit score if you get new accounts after consolidating, so you really need to stick to your consolidation plan once you put it in place. Closing credit card accounts is not something you should take lightly.
