Should you close a credit card with a high interest rate?

0

Image source: Getty Images

The quick answer? Not necessarily.


Key points

  • The higher your credit card’s interest rate, the more you’ll pay when you carry a balance.
  • But high-interest credit cards can have perks that are worth keeping.

Credit card companies do not allow you to carry a balance with a good heart. Instead, they charge interest on balances that aren’t paid in full each month. And sometimes that interest can be substantial.

If you have multiple credit cards and one has a higher interest rate than the others, you may be considering closing that account. But is it really the right decision?

One email a day could save you thousands

Expert tips and tricks delivered straight to your inbox that could help you save thousands of dollars. Sign up now for free access to our personal finance boot camp.

By submitting your email address, you consent to us sending you financial advice and products and services which we believe may be of interest to you. You can unsubscribe anytime. Please read our privacy statement and terms and conditions.

Assess high interest versus built-in benefits

The higher the interest rate on your credit card, the more it will cost you to carry a balance. But if you’re able to pay all of your bills each month and avoid carrying a balance, your card’s interest rate may not even matter. You should not necessarily rush 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. This might be a card worth keeping for those extra rewards alone.

Don’t forget your credit score

Credit cards are a tool that can help you build credit and improve your existing credit score. And sticking to 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 one time. The higher your total spending limit across all of your credit cards, the lower this ratio will be (and to be clear, you to want this ratio remains 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 credit card that’s been open for many years, closing it could reduce the average length of your open accounts, damaging your credit score in the process.

An unused credit card could benefit you

A credit card with a high interest rate may not be a good card to use regularly, if at all. But that doesn’t mean you have to get rid of this card.

Instead, consider hanging on to it, but simply not using it. This way, you can benefit from a credit score perspective without having to worry about racking up tons of interest on purchases you make that you can’t immediately repay.

That said, if your credit card with a high interest rate also charges an annual fee, you might want to get rid of it. But if there are no fees involved, then keeping that card open might actually work to your advantage.

The best credit card erases interest until 2023

If you have credit card debt, transfer it to this top balance transfer card guarantees you an introductory APR of 0% in 2023! Plus, you won’t pay any annual fees. These are just a few of the reasons why our experts consider this card a top choice to help you control your debt. Read the full The Ascent review for free and apply in just 2 minutes.

Share.

Comments are closed.