When Not to Throw your Credit Card in the Trash

With all of our cautionary advice, it probably seems like Savvy Student opposes the use of credit cards across the board. The truth is, credit cards, when used wisely, can help a financially responsible person build an excellent FICO score that can be used to secure a loan, a job or an apartment in the future. Some cards even come with travel and shopping "points" or reimbursements that can actually save money (assuming you don't carry a balance on your card). Credit cards are certainly not all bad.

However, if you lose control over your spending, it may be wise to close your credit card account completely to squash the temptation to spend. This choice does involve a compromise, as closing the account completely may actually hurt your credit score, particularly if you are carrying a balance.

Get Rich Slowly explains the reasons:
"1. The longer you’ve had an account, the more weight it carries. 2. Say you have two cards, both with $5,000 limits. You’re carrying a $2,000 balance on one of the cards, or about 20% of your total available credit. If you close the unused card, you’ll then be using 40% of your available credit, and your “utilization ratio” will jump, giving a temporary ding to your credit score."

Canceling an account early or utilizing more of your credit limit due to card cancellation can hurt your credit score, but if your habit of spending money you don't have is putting you into serious debt, you may have to take a hit to your score to preserve your finances. This decision is truly a matter of determining which option is the least detrimental in the long run.

If you do decide to cancel your card, make sure you call the company to do so. If you're closing a card with a balance, note that some companies will increase your interest rate on the remaining balance if you close your card. Then, cut up the card and dispose of it. If you would prefer to keep the card open but avoid using it, try opening a safe deposit box to hold it or freeze the card in a block of ice à la "Confessions of a Shopaholic." Just be sure to keep the card in a safe but inconvenient place so you don't reach for it when items on your wish list go on sale.

Decisions like these are all about making trade offs. Sit down and figure out what will hurt you more in the long run: the possibility of a higher interest rate on a future loan because of a slightly lowered credit score or the temptation to spend with plastic?

Good luck,

Savvy Student