Definition of a Closed Credit Card Account
If you have credit cards that you do not use or accounts with high balances, you may be thinking about closing your account. Before moving forward, be sure to consider the effects of this action.
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Identification
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A closed credit card account is simply one that you can no longer add charges to; in short, you no longer have access to that line of credit. However, you are still responsible for paying the balance remaining on the closed account. In addition, credit card companies sometimes close accounts if they are inactive.
Benefits
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If you tend to spend beyond your means simply because you have credit available, closing credit card accounts may be helpful to help you get your budget in line. In addition, you may be able to lock in your current interest rates as you pay down your balance.
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Considerations
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Closing a credit card account can negatively impact your credit score. When you close an account, you reduce your amount of credit available. If you are carrying a high balance or several balances across many cards, a reduction in available credit increases your credit utilization ratio, according to the Fair Isaac Corporation (FICO). As your credit utilization ratio goes up, your credit score can drop.
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