Should You Close a Credit Card With a High Interest Rate?

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The quick answer? Not necessarily.

Key points

  • The higher your credit card's interest rate, the more you'll pay when you carry a balance.
  • But high interest rate credit cards may come with benefits that make them worth keeping.

Credit card companies don't let you carry a balance out of the goodness of their hearts. Rather, they charge interest on balances that aren't paid in full every month. And sometimes, that interest can be substantial.

If you have a number of credit cards and one has a higher interest rate attached to it than the rest, you may be thinking of closing that account. But is that really the right move?

Weighing high interest against built-in benefits

The higher your credit card's interest rate, the more it will cost you to carry a balance. But if you're able to pay your bills in full every month and avoid carrying a balance, then your card's interest rate may not even matter. You shouldn't necessarily rush to close out a card with a high interest rate.

Furthermore, it may be that a card with a higher interest rate also offers a number of perks that can save you money or put more of it in your pocket. Say one of your cards has a higher interest rate than the rest but also offers the most cash back for everyday purchases. That may be a card worth keeping for those extra rewards alone.

Don't forget about your credit score

Credit cards are a tool that can help you build credit and improve your existing credit score. And hanging onto a card with a high interest rate could benefit you from a credit score perspective.

One factor that goes into calculating credit scores is your credit utilization ratio, which measures the amount of your available revolving credit you're using at once. The higher your total spending limit across all of your credit cards, the lower that ratio will be (and to be clear, you want that ratio to stay low). And so, if you close out a credit card with a high interest rate, you could end up lowering your total spending limit and hurting your credit score in the process.

Also, the length of your credit history plays a role in determining your credit score. If you have a high interest rate credit card that's been open for many years, closing it could reduce the average length of your open accounts, thereby damaging your credit score in the process.

An unused credit card could benefit you

A credit card that comes with a high interest rate may not be a great one to use regularly or even at all. But that doesn't mean you should get rid of that card.

Instead, consider hanging onto it but simply not using it. That way, you can benefit from a credit score perspective without having to worry about racking up tons of interest on the purchases you make and can't pay off right away.

With that said, if your credit card with a high interest rate also charges an annual fee, then you may want to get rid of that card. But if there's no fee in play, then keeping that card open could actually work to your advantage.

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