Should you close a credit card with a high interest rate?
The quick answer? Not necessarily.
Credit card companies don’t let you carry a balance out of the goodness of their hearts. Rather, they charge interest on balances that are not fully paid each month. And sometimes that interest can be substantial.
If you have more than one credit card and one has a higher interest rate than the others, you may be considering closing that account. But is it really the right decision?
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Count high interest versus built-in benefits
The higher the interest rate on your credit card, the more it will cost you to keep a balance. But if you’re able to pay your bills in full each month and avoid carrying a balance, your card’s interest rate may not even matter. You shouldn’t necessarily be rushing to close a card with a high interest rate.
Additionally, a card with a higher interest rate may also offer a number of benefits that can save you money or put more in your pocket. Suppose one of your cards has a higher interest rate than the others, but also offers the most cash back for everyday purchases. Perhaps this is a card worth keeping for those additional rewards alone.
Remember your credit score
Credit cards are a tool that can help you build your credit and improve your current credit score. And holding onto a card with a high interest rate could benefit you from a credit score standpoint.
One factor that goes into calculating credit scores is your credit utilization rate, which measures how much of your available revolving credit you are using at a time. The higher your total spending limit on all of your credit cards, the lower this ratio will be (and to be clear, you to want this ratio to stay low). And so, if you close 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.
Additionally, the length of your credit history plays a role in determining your credit score. If you have a high interest rate credit card that has been open for many years, closing it could reduce the average length of your open accounts, damaging your credit score.
An unused credit card could benefit you
A credit card with a high interest rate may not be ideal to use regularly, or even at all. But that doesn’t mean you have to get rid of this card.
Instead, consider hanging onto it just not using it. That way, you can benefit from a credit score prospect without having to worry about accumulating tons of interest on the purchases you make that you can’t pay off right away.
That said, if your credit card with a high interest rate also charges an annual fee, you might want to get rid of that card. But if there are no fees involved, then keeping that card open might actually work to your advantage.