Controlling Spending

• One reason for a cardholder to cancel a credit card that has a balance is to eliminate the chance of spending more of the available limit. If the consumer has a problem resisting the temptation of charging new amounts to the card, closing the account eliminates that issue. Also, if the consumer decides to enroll in a debt management plan -- a payoff plan managed by credit counseling services -- he may have to close the account as a condition of the program to stop adding new charges to the balance.
  
  

Low Balance

• Another consideration a consumer must take into account when deciding to cancel a credit card with a balance is the credit utilization ratio. This ratio is the amount of credit used divided by the credit limit offered by the bank. So if the consumer has a very low balance on the account compared with the credit limit, that means that he has a low credit utilization ratio. In general, the lower the total credit utilization ratio for a consumer's debts the better the credit score. If the consumer closes the low balance credit card account that could lower his credit score.
  
  

High Balance

• On the other hand, if the consumer has a high balance and credit utilization ratio or simply has "maxed out" his cards, closing the account may not have as much of an effect on his credit score at that time. However, if he chooses to keep the account open and pays down the debt balance that would lower the credit utilization ratio over time, which in turn may increase the consumer's credit score.
  
  

Suggestions

• If the consumer decides to keep an account open that has a balance so that he can maintain or lower his credit utilization ratio, it's a smart idea to change the account card number and cut up all cards to resist making further purchases. Changing the card number is important to resist the urge to enter the credit card information from memory for online purchases. It is helpful to consult a nonprofit credit counseling service to make the final decision on whether to close the account.
  
  

Considerations

• A credit card company may make the decision to close a consumer's card for risk management reasons, such as payment default or non-use. When the bank closes the account it could leave a negative mark on the consumer's credit history, but if the consumer is the party who closed the account, that action alone -- credit utilization ratio aside -- doesn't usually negatively affect the credit score.