Is your wallet swimming with credit cards? It may be time to decide which ones should stay and which are ready to get out of the pool.
“It's important to decide if a given credit card is right for you,” notes Gary Leff, co-founder of the Milepoint.com frequent flier community and author of the travel blog ViewFromTheWing.com. If a card no longer fits your financial situation, you could pay fees for services you don't need, have trouble managing the account or rack up rewards you don't plan to use.
Experts lay out five times when it might be in your best interest to part ways with a card — and the steps to take before officially saying adios to your account.
1. Your balance is out of control.
Not all people can handle the responsibility — and temptation — that comes with credit. For many, a credit line is an invitation to buy things they can't afford.
“It's time to close when your monthly expenses – with or without a credit card — exceed your monthly income,” says Marjorie Anderson, personal finance expert and author of “THE KEY: Wise Money Choices for Teens.”
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If an open credit line is too tempting and you're committed to putting the card on ice in order to get your balance under control, you can cut up, cancel or freeze the account
Do this first: Because active credit cards are good for your credit scores, do what you can to keep the card alive. Evaluate your assets and financial situation, suggests Anderson. You may find that by making a few changes, you can keep up with monthly bill and keep the card open.
If you still decide nixing the card is the way to go, call the bank and ask it to freeze the card to future charges so you can concentrate on paying back what you owe. Once the balance is zeroed out, you'll be able to cancel the card for good. Not all banks allow individual accounts to be frozen, however. If yours doesn't, consider cutting up your credit card so that you can no longer use it. Pay off the balance, then cancel.
Also, consider moving the debt to a balance transfer card that offers a 0 percent introductory period. You can then immediately cancel the old card, plow through the debt without incurring more finance charges and then cancel the balance transfer card once the debt is gone, if you wish.
2. The annual fee is too high.
If you have a card that offers great perks but charges a steep yearly fee, a review may be in order.
“Calculate what value you're getting out of the card on a yearly basis,” recommends Brian Kelly, founder of travel rewards website ThePointsGuy.com. Some banks let you download a report showing your account's activity for the past year. If you can't find a report online, call the card issuer and ask a representative if you can get your spending and rewards-earning data.
“Educate yourself on all the different perks,” Kelly says. For instance, if a card with a high annual fee gives you a free stay in a luxury hotel each year, that single reward could outweigh the cost of the annual fee.
You might find, however, that you haven't been using that free hotel stay, or that you're paying $75 a year for the card but haven't used it to make a purchase in the past 18 months. In these cases, it may be time to consider using any points you have on the card and then closing it.
Do this first: Before canceling, ask the issuer to waive the fee or give you bonuses that outweigh it, suggests Kelly.
If you can get the annual fee waived, keep the card, recommends Leff. If you've had the card a while, keeping it will help improve the average age of your accounts, which factors into your credit score. It will also give you available unused credit. This helps your utilization ratio, which compares the amount of credit you are using to how much you have available.
3. It's a credit-building card you've outgrown.
Perhaps some time ago your finances bottomed out or you were just getting started building your credit. If so, you may have taken out a secured card — a card designed for those with imperfect credit that requires a security deposit in exchange for a credit line.
However, most secured credit cards come with hefty fees and high interest rates. So, if your credit has improved thanks to the secured card, it may be time to move on.
Do this first: Ask the issuer to convert the card into a conventional credit card, suggests Leslie Tayne, founder of Tayne Law Group, a Melville, N.Y.-based firm that specializes in consumer debt resolution. “That way you won't have to go through the process of closing and opening,” she says.
If that's not possible, “Get the new credit card first and then close the secured card,” Tayne says. Doing so will ensure that any dips in your credit score from closing your account will not make it hard to open a new one.
4. You don't like the terms.
Perhaps your card has a high interest rate, and you've noticed comparable cards on the market with lower ones.
“Interest rates can be an issue for people who carry balances,” says Greg Meyer, community relations manager at Meriwest Credit Union in San Jose, Calif., and author of The Credit Union Guy Blog. An increase in the APR from 15 percent to 18 percent can cost a cardholder an extra $150 a year on a $5,000 credit card balance, he says.
Even if you're satisfied with the interest rate, you might want a higher credit limit than what's currently available on the card, so that you're not constantly hitting your credit ceiling for large purchases.
Do this first: Before switching, contact the issuer and ask to have the interest rate reduced or your credit limit raised on your current card.
For a higher limit, simply call the card issuer and ask. “If someone has good income, a good rating and payment history, there is no reason the provider should not increase the limit,” Meyer says. Keep in mind, though, that the issuer will likely pull your credit reports to make sure you qualify for a higher credit limit — and that hard pull could temporarily ding your score.
When it comes to asking for a lower interest rate, tell the issuer you've noticed other cards on the market with lower rates — and say you're thinking of switching. That often can be enough to get the issuer to work with you, but be prepared to move forward if the issuer cannot meet your request.
5. You just have too many cards.
Perhaps those pieces of plastic make you think of spending more, or they are so crammed in your wallet it's hard to find the best option to use for specific purchases. If so, dropping some of your cards could simplify your finances.
The right number for you depends on your discipline and desire for rewards, but if you're floundering, “Try to manage one to three credit cards at most,” suggests Tayne.
Do this first: Do the math to find out what your credit utilization ratio will be without a particular card.
“Closing a card removes that available balance from your overall available credit,” explains Meyer.
That change can affect your overall utilization ratio, which, in turn, can have a negative impact on your credit score. If you trim your available credit limit too much, and have high balances on your remaining cards, your utilization ratio will be high — and that's a turn-off to lenders. Your best bet is to close newer cards with lower credit limits, and when closing cards, don't close them all at once. Give your credit score time to recover (say, six months to a year) between closing accounts.
So be wary of closing too many cards if you're going to take out a major loan, such as a mortgage, in the near future. Because a lower credit score could lead to higher interest rates, wait until you've completed the loan process to make any credit card changes.