Having a credit card is good for your credit score, provided you use it wisely. However, there may have been times when you wished to close a credit card, say when your credit provider increased the annual fee, or you were being offered a better deal by another institution.
But closing a credit card is bad for your credit score, right?
Well, that’s not always the case. Credit card usage definitely helps your credit score, but sometimes it is necessary to pull the plug. Below we share five situations in which it is wise to cancel your credit card:
1. High Annual Fee
Plastic money isn’t cheap. Swanky credit cards often come with high annual fees for all the perks they offer.
However, is it worth it?
Do some simple mathematics to check whether the combined rewards on your card make up for the high annual fees. For example, if you have a travel card with high annual fees, it is worth checking the cost of the flights you have redeemed against the annual charges to ascertain whether the card is worth its salt or not.
2. Uncontrolled Spending Habits
Using a credit card is useful if you are financially disciplined. However, if you find yourself maxing out your card often, you may be better off without a credit card.
Yes, overspending can leave you in a cycle of debt made worse by potential late fees and high-interest on unpaid credit. Besides, closing your credit card does not impact your credit score as much as having high debt on your file or defaulting on your repayments.
3. Separation or Divorce
When couples separate, things often get ugly, and there’s no point in jeopardising your finances along with your marriage. In case you are getting separated, it is best to close your joint credit card, as you do not want to be responsible for any expenses incurred on the card by your former spouse.
Remember, even if you are legally divorced, if you hold a joint credit card with your ex, your credit card issuer will hold you equally responsible for the charges incurred by either of you.
4. Fraudulent Activity on Card
Most credit providers automatically close your credit card and issue a new one in case of theft or loss. However, sometimes you may notice unauthorised charges on a card that has not been compromised in any way. This may happen when you cancel a monthly subscription but continue getting charged by the business despite notifying it of the issue. In such a case, it is best to close your credit card to prevent any unauthorised use in the future.
5. Better Rewards Elsewhere
Today, the market is full of credit cards associated with lucrative reward programs. For example, some cards, such as American Express, offer great travel rewards. Then, certain cards give extra bonuses on refuelling at specific pumps, making them beneficial for individuals who drive a lot. So much of choice means that you can pick and choose a credit card that is tailored to your spending habits to get the max out of it. Thus, if you own a travel-related credit card but don’t travel that often, a card that offers cashback or other rewards may be more beneficial for you, and it makes sense to switch to an option that gives you more bang for your bucks.