Should you close a high interest rate credit card?

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Quick response? Not necessary.

  • The higher the interest rate on your credit card, the more you will pay if you have a balance.
  • But high interest rate credit cards can have benefits that make them worth keeping.

Check out the best The Ascent credit cards for 2021

Credit card companies don’t let you keep your balance out of the kindness of their heart. Rather, they charge interest on balances that are not paid in full each month. And sometimes this interest can be significant.

If you have multiple credit cards and one of them has a higher interest rate than the others, you might consider closing that account. But is this really the right move?

Weighing high percentages versus built-in benefits

The higher the interest rate on your credit card, the more it will cost to hold the balance. But if you can pay your bills in full every month and have no balance, then the interest rate on your card may not even matter. It is not necessary to rush to close a card with a high interest rate.

In addition, it may turn out that the card with the higher interest rate also offers a range of benefits to help you save money or put it in your pocket. Let’s say one of your cards has a higher interest rate than the rest, but also offers the most cash back for everyday shopping. It might be worth keeping this card just for the extra rewards.

Don’t forget your credit score

Credit cards are a tool that can help you get credit and improve your existing credit rating. And using a card with a high interest rate can benefit you in terms of your credit rating.

One factor that is used in calculating credit scores is the loan utilization rate, which measures the amount of available revolving credit that you use at one time. The higher the total spending limit on all your credit cards, the lower that ratio will be (and, to be clear, you to want this ratio to stay low). So, if you close a high interest rate credit card, you may end up lowering your overall spending limit and thus lower your credit score.

In addition, the length of your credit history plays a role in determining your credit rating. If you have a high interest rate credit card that has been open for years, closing it can shorten the average length of your open accounts, thereby damaging your credit score in the process.

Unused Credit Card May Benefit You

A credit card with a high interest rate may not be suitable for regular use or use at all. But this does not mean that you should get rid of this card.

Instead, consider holding onto it, but just not using it. This way, you can benefit from a credit rating perspective without worrying about getting tons of interest on the purchases you make and can’t pay off right away.

With that said, if your high interest rate credit card also charges an annual fee, you can get rid of that card. But if there is no commission in the game, then keeping that card can really work in your best interest.

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