Credit Cards, Smart Spending

Financial Gardening – Weeding Your Credit Cards

If your wallet overflows with credit cards, you may decide that now’s the time to do a little financial gardening. Most people have at least one credit card in their name. For some, one credit card is more than enough. Other people prefer two credit cards. Maybe a primary credit card, plus a back up card. However, if you have a lot of credit cards and you don’t use most of them, weeding through your cards and closing a few accounts can simplify your finances.

Deciding which credit cards to keep and which credit cards to close can be challenging. There is a wrong and a right way to get rid of credit cards. And if you close accounts the wrong way, you can unintentionally hurt your credit score. Here are three tips for deciding which credit cards to keep and which ones the cancel.

1. Keep your oldest credit card

Some people don’t realize how the length of their credit history impacts their credit score. The length of your credit history makes up 15% of your credit score. For this reason, it is important that you keep your oldest accounts open. Closing your oldest accounts can significantly reduce the length of your credit history, thus dropping your credit score.

Many financial experts discourage closing credit card accounts. Instead, they recommend keeping unwanted credit cards in a safe place outside the wallet. This approach works for some people. However, if you prefer canceling a few of your credit cards, start with your newest cards and close these account slowly – perhaps one every few months. Your newest cards have the shortest history, and closing these accounts will do the least amount of damage to your score.

2. Check your interest rates

Some people decide to close accounts after paying off their balances. Not only should you keep your credit cards with the longest history, you should keep your credit cards with the lowest interest rates. A competitive interest rate on a credit card is around 13%. However, some credit card companies charge as much as 22% or 23%, even if an account holder has a good credit history.

When deciding which credit cards to keep and close, pull out all your statements and compare your interest rates. If you need to trim your number of credit cards, start with the accounts that have the highest rate. But don’t automatically conclude that it’s best to close the account with the highest rate. The highest rate may be attached to your oldest account, in which closing the account can harm your credit score. In this case, keep the account open and pay off the card in full each month to avoid high interest charges.

3. Keep credit cards with a rewards program

If you are a frequent credit card user, it makes sense to keep your credit cards that feature a rewards program. Some people use their credit cards to pay the mortgage, buy groceries and take care of other everyday expenses. The more they use their credit card, the more points they can earn towards merchandise, gift cards and travel. In the end, keeping your rewards credit card saves money. And because these credit cards typically feature low, competitive rates, you’ll pay less in interest each month.