Americans love credit, and it shows. The average consumer had 2.35 bankcards and 1.51 retail cards in 2016, according to Experian's annual "State of Credit" report. Credit card usage can be a good thing, but it also carries a lot of risks. So is it time to pull the plug on yours? Here are a few good reasons to say goodbye.
In a divorce, splitting your finances can be as difficult as ending the relationship. In the case of joint credit cards, even a divorce decree won't make it easy. If you signed up for a card together, the issuer still expects both of you to take responsibility for any outstanding balance. While you can both close the card to prevent future purchases, your lender will look to you for payment if your ex fails to honor the divorce settlement. With this in mind, there are a few ways to approach the problem after closing your card:
- If your ex is willing, ask them to open a credit card in their own name and transfer the balance. This will effectively close your joint account for good and release you from any liability. It will also prevent your ex's debt from impacting your personal credit scores in the future.
- If your ex isn't cooperative, ask the judge to stipulate that they must use their settlement money to pay off their portion of joint credit balances.
- If neither scenario is possible, sign up for online account monitoring to track your ex's payments. If things go awry, consider paying the bill to avoid damage to your individual credit, and consult your attorney about the next steps.
2. Rising annual fees
High-end credit cards usually come with annual fees to account for all the perks they provide, but how much are they really worth? Some simple math can show whether the combined value of your rewards is greater than the fee you're shelling out every year. For example, I opened an American Express (NYSE:AXP) Platinum card a few years ago when I began travelling on a regular basis. The annual fee is $500 -- by no means cheap -- but the combined rewards are worth the expense as long as I book at least two round-trip flights per year.
On the other hand, because this card mostly offers travel benefits, the value of its perks wouldn't add up if I were suddenly homebound, and an increase in the annual fee would definitely lead me to reexamine my need for it. Take stock of your credit card's value compared to the annual fees. If your needs have changed or a recent increase has you worried, ask your issuer to explain the reason behind it. Some may be willing to waive the fees entirely to prevent you from closing your account.
3. Impulse control
Nearly 60% of Americans have maxed out a credit card at least once in their lives, according to an American Consumer Credit Counseling survey, and it's a tough habit to break. Overspending with credit can leave you saddled with balances that increase by the day thanks to high APR interest, potential late fees, and max-out penalties. If you can't control yourself, it's a good idea to close your credit cards -- even the ones with remaining balances. You'll still be able to pay off your debt, but you won't be able to keep making charges.
4. Better rewards elsewhere
Maybe you signed up for a credit card to reap the rewards, but now you're having second thoughts. Worse yet, maybe you've found another card that offers better rewards and you're missing out. Consider the bottom line by doing a side-by-side comparison. For instance, suppose your current card offers 5% cash back on up to $5,000 of purchases per year ($250). On the other hand, Card X offers 3% cash back on unlimited purchases. That means you'd need to spend $8,333 per year on Card X to match the maximum rewards of your current card. If you spend less than that, then there's no reason to switch to Card X. If you spend more than that, then you can ask your issuer to match Card X's benefits. If that's not an option, it's time to move on.
One reason to keep your card open
There are a lot of good reasons to close your credit card, but there's one good reason to keep it open: your credit score. That three-digit number is vital when you want to open new credit accounts and finance big-ticket items like a house or a car, and a higher score means access to better terms and interest rates. While closing your credit card isn't likely to tank your score on its own, it could reduce the average age of your accounts and your credit-to-debt ratio, which are two major factors in your overall credit score.
That said, there's good news: You may have noticed that there's an opportunity for negotiation in almost every scenario listed above. Your credit card provider wants to keep you as a customer, and there's a good chance it would rather meet you halfway than close your account. There are no guarantees, but changing the terms of your credit account could be better than closing it entirely. Make a choice that honors your short-term needs and your long-term credit health.