Should I Close a Credit Card After the Intro Period Ends?
Perhaps you applied for a 0% APR credit card to transfer a balance or make a large, one-time purchase. Now, the introductory period is ending, and you are unsure whether to keep the card open. Before making the phone call to your credit card issuer, there are a number of factors to consider.
What is an Introductory Rate?
Before we dive into whether you should close your card after the introductory rate has passed, it is important to know what these rates are. Normally, an introductory rate is when you pay no (or a very low) interest rate for an initial period of time. Currently, introductory rates range from six to 21 months. After this pre-determined period of time, your interest rate will increase to an amount determined by your credit worthiness. Before applying for such a card, you will want to read the terms and conditions, as they will list the interest rates you could end up paying.
What if I’m carrying a balance?
If you are carrying a balance on your credit card, you will be charged interest on any remaining amount. Let’s say you owe $800 on your credit card, and your interest is 14.9%. By the end of a year, you will end up paying about $120 in interest.
Additionally, with some credit cards, that 0% introductory rate may just be a deferred interest rate. With these types of cards, if you do not pay off your balance in full within the allotted time period, you will owe interest on the entire balance. Let’s say you have a deferred interest card and you initially transferred $2,000 from another credit card to open it. Even if you only owe $800, you will be charged interest on the $2,000 that you initially transferred. At 14.9% interest, you will owe close to $300 in interest during that year.
Even with these interest charges, it is best to keep the card open and pay off the balance as soon as possible. While you could open a new credit card with a 0% introductory rate and transfer the balance, you will have to pay balance transfer fees. In addition, opening a new card could negatively impact your credit if you have opened many accounts in a short period of time.
What if I’ve paid off the card?
If you have paid off the card, you may be wondering if you should now close it. There are two things you will want to consider before doing so.
The Interest Rate
One of the most important factors to determine is your new interest rate. If it is lower than other credit cards in your wallet, you will want to keep the account open for future purchases or emergency expenses. If it is considerably lower than other cards on which you are carrying a balance, you may want to consider transferring those balances to this card. Before doing so, though, make sure you check any balance transfer fees. If the fees are higher than what you will save in interest payments (or if you cannot pay off the balance during the introductory period), the transfer is not worth it.
The Impact on Your Credit
Another thing to keep in mind before canceling your card is the impact it will have on your credit score. The second-most important factor in determining that three-digit score is your debt-to-credit ratio (or credit utilization). To maximize your credit score, you want to use no more than 30% of your available credit. If you are carrying balances on your other credit cards, and you cancel a card, it could negatively impact your credit utilization.
Let’s look at a simple example. The card you are considering closing has a balance of $0 and a credit limit of $5,000. You have two other credit cards: one has a balance of $3,000 and a limit of $5,000, and the other has a balance of $1,500 and a limit of $5,000. Thus, you have a credit limit of $15,000 and are carrying a balance of $4,500, which means you are using 30% of your available credit. If you were to cancel the card with no balance, you would be using $5,000 of your available $10,000, or 50%. In this scenario, your credit score would suffer, as you are now utilizing more than 30% of your available credit.
So should you close the card?
Even if you have paid off the balance on the card, it is usually better to leave your card open–even after the introductory rate has passed. It helps your credit utilization. However, if you can’t control your spending and having another credit card in your possession tempts you to spend more money, then you should close the account.
If you still owe money on the card, pay it off as quickly as possible.