You might regret listening to this financial advice.
- Dave Ramsey suggests canceling credit cards as soon as you’ve paid off your balance.
- He doesn’t think the impact on his credit score is significant.
- Heeding this advice could come back to haunt you with a lower credit score.
Dave Ramsey is a well-known financial expert and one of his best tips is to avoid debt. He not only suggests that he shouldn’t borrow and pay interest, but he also believes that he shouldn’t use credit cards at all.
Given that Ramsey doesn’t think credit cards are worth having, it’s probably not surprising that he advises consumers to cancel their cards as soon as they’ve paid off the balance due. But while he has suggested that closing credit cards is a smart financial choice, it’s actually bad advice.
This is what Ramsey had to say about canceling credit cards
The topic of closing credit cards has been covered on the Ramsey Solutions blog. As the blog explains, it’s not enough to promise to stop using credit cards or even cut up your cards so you can no longer easily use them.
“Just because you destroy your cards and promise never to use them again doesn’t mean they’re gone, you also have to close the accounts,” the blog reads. Ramsey goes on to provide advice on how to close his account, including waiting until he has paid off his balance, then contacting his card issuer to close the account, and then getting written confirmation.
The blog acknowledges, however, that the general consensus among financial experts is that closing credit accounts is a bad idea. “It turns out that many people will try to tell you that closing a credit card is the worst decision of your life. Don’t worry, that’s not the least bit true,” it reads.
Ramsey downplays the very valid reasons why closing old cards is a bad idea, suggesting that you should go ahead with this financial move even though doing so could come back to haunt you.
Ramsey is wrong to close old credit cards
The big reason most experts advise against closing old credit card accounts is because doing so can hurt your credit score. And Ramsey’s blog acknowledges that this is a problem. “When you close your credit card account, your score will go down a little bit, but only for a short period of time.”
However, the reality is that, depending on your situation, closing your old account may have a bigger impact than he suggests, and the impact could be long-term.
See, your credit score is based on several factors. These include payment history, the average age of your accounts, the types of credit you have available, the amount of credit you use relative to the amount available to you, and inquiries that are placed on your credit report when you apply for new credit. credit.
The impact of closing a credit card account
Closing credit cards affects many of these key factors that determine your score. If you close old accounts, the average age of your credit will be lower and this will hurt your score, since a long history of responsible lending is better. You’ll stop developing a positive payment history once your card is no longer open, and eventually the card will no longer be on your credit report, meaning you’ll lose track of any on-time payments you’ve made in the past.
More importantly, your credit utilization ratio could be affected and this is the second most important factor in determining your score. To understand how, take a simple example.
Let’s say you have two credit cards, each with a limit of $1,000, and you’ve loaded $500 on one card and nothing on the other. If you close the account with a $0 balance, your credit utilization ratio is $500 used of the $1,000 available (50%) and a high utilization ratio hurts your score. But if you didn’t close your old account, your ratio would be $500 of $2,000, meaning you’d be using only 25% of available credit (anything over 30% lowers your score quite a bit).
The bottom line is that there’s no reason to close old credit cards and take a hit to your credit score that could be substantial. Even if you don’t want to use your cards much anymore, you can charge them a streaming service each month and set up automatic payments so you don’t have to worry about debt but can continue to build a credit history that can open doors for you. for you in the future.