A credit card is one of the practical ways to go cashless and make life much easier. But, with rising living expenses and escalating credit card interest rates, you might decide that closing one or more of your credit cards will help improve your financial situation and reduce debt. But, before deciding to do so, you must consider a few crucial factors.

Your credit score could temporarily drop if you close a credit card. It is so, as your credit score is affected by the length of your credit history and your credit utilization ratio.

An older credit card has a better positive effect on your credit score, so do not close it. Your credit score will not suffer much if it is one of your more recent open accounts than one of your more established ones, so if you have several credit cards, cancel the most recent ones first.

It is done by dividing your outstanding debt by the combined credit limit on all your cards. Even if you close a credit card with a zero balance, it will lower your overall credit limit and raise your credit utilization ratio when combined with the balance on your remaining cards.

However, if you continue to utilize your other credit accounts responsibly, this impact will be gone in a few months.

Depending on the card issuer, you may not be able to close a credit card account until the balance is zero. And, if you are severely behind on your credit card payments, many credit card companies will close your account even though there is a balance, and you are still responsible for paying it back. If you have financial difficulties and cannot repay the money, you will incur interest and late payment fees.

Therefore, decide whether to pay off the balance or transfer it to another card before closing the current account.

Is it worthwhile to keep the card open? Have you accumulated reward points on a credit card you’re considering closing? You should use your reward points from the specific credit card you’re canceling. Before requesting to close or cancel your card, check the reward points not redeemed. You can also obtain discounts on gift cards or other offers when you cash your reward points. However, if it has a high annual fee, you might not be using enough of the perks and rewards to make it worthwhile.

Perhaps you’ve been using the credit card each month to pay your cable or auto insurance bill. So, before closing the credit card, you must cancel your automatic bill payments and transfers and put it on a different card. If you forget to do this, these payments won’t be accepted after your account is closed, and there’s a possibility that the billing company will charge you late fees, or your service might be suspended.

Contact the credit card company that issued your card to learn if there are any other options you can switch to without closing your account. If the annual fee is the issue, you can request them to eliminate it or downgrade to a no-fee card in the same portfolio. In some cases, if you switch to a different card from the same issuer, the account’s age will remain the same; you should consult customer service about this.

However, if you have financial difficulties and cannot repay the money, you can transfer it to another credit card with O% APR or take out a personal loan to pay back the balance.

Still unsure if closing your credit card account is the best course of action? Consider when it makes the most sense to cancel a credit card.

Even though it is not a good idea to close your credit card, there are times when it makes sense to do so. A slight drop in your credit score is preferable to experiencing a significant decline that would leave you in a financial mess and cause your credit score to continue to decline.
However, before canceling a credit card, it is crucial to consider several factors, including using all your reward points and ensuring that your account balance is $0.