Should You Close a Credit Card with a Low Limit or Keep It Open?
When deciding whether to close a credit card with a very low limit, such as $500, the decision can significantly affect your overall financial health. This article explores the pros and cons of closing or keeping the account open and provides valuable insights into how credit card limits and utilization impact your credit score.
Understanding the Risks of Keeping a Low Limit Card Open
Having credit accounts open that you never use is generally not a good idea for several reasons. Both the number of open accounts and the total available credit can potentially hurt your ability to borrow money later. This is because credit utilization, which is the ratio of your debt to your credit limit, is a critical factor in calculating your credit score.
The Importance of Regular Usage and Payment
Even if your credit limit is low, using the card regularly and paying it off in full each month can help improve your credit utilization. This is especially important if you cannot get any cards with higher available credit. By maintaining a low balance, you can significantly reduce your overall credit utilization, which can benefit your credit score.
When to Consider Closing the Card
However, if the credit card charges a membership fee, it makes sense to find a card without such fees. If your credit is so poor that you can't get any other cards with better terms, you may need to pay the fee to reestablish your credit.
How to Negotiate a Higher Limit
If you have accounts with low limits, there are steps you can take to increase your credit limit. After 6-12 months of responsible usage and full payments, many banks will offer to increase your credit limit. Additionally, you can call the bank directly and request a higher limit without impacting your credit score. While they might not initially approve it, it doesn’t hurt to ask.
The Potential Future Impact of Keeping a Low Limit Card Open
By keeping a low limit card open and occasionally using it, you maintain a longer credit history, which is a positive factor for credit scores. However, if you choose to close the account, while you may not be "sticking it to the bank," you could potentially lose access to that open credit, which could improve your overall credit utilization if closed.
Conclusion: Balancing Risks and Benefits
The decision to close a credit card with a low limit is not straightforward. Balancing the risks of keeping a low limit card open against the potential benefits of retaining it can be complex. If you are mindful of your credit usage and are diligent about paying off your balances, keeping a low limit card can be beneficial. On the other hand, if the card charges fees or if you need to focus on building your credit history, closing the account and seeking better options may be the best course of action.
It is essential to understand the impact of your decisions on your credit score and financial future. Making informed choices can help you build a stronger credit profile and improve your borrowing capacity in the long run.