Why Dave Ramsey is wrong about canceling credit cards
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 believe the impact on your credit score matters.
- Listening to these tips could come back to haunt you with a lower credit score.
Dave Ramsey is a well-known financial expert, and one of his biggest tips is to avoid debt. Not only does he suggest that you shouldn’t borrow and pay interest, but he also believes that you shouldn’t use credit cards at all.
Given that Ramsey doesn’t think credit cards are worth it, it’s probably unsurprising that he advises consumers to cancel their cards as soon as they’ve paid the balance owing. But, while he advised that closing credit cards is a smart financial move, it’s actually really bad advice.
Here’s what Ramsey said about canceling credit cards
The issue of closing credit cards was discussed on the Ramsey Solutions Blog. As the blog explains, it’s not enough to promise to stop using credit cards or even cut your cards so you can’t easily use them.
“Just because you destroy your cards and pledge never to use them again, doesn’t mean they’re gone – you should also close the accounts,” the blog post reads. Ramsey goes on to give advice on how to close your account, including waiting until you’ve paid your balance, then contacting your card issuer to close the account, and then getting confirmation in writing.
The blog acknowledges, however, that the general consensus among financial experts is that closing credit accounts is a bad idea. “It turns out that a lot of people will try to tell you that closing a credit card is the worst decision of your life. Don’t worry, that’s not even a tiny bit true,” it reads.
Ramsey plays down very valid reasons why shutting down old cards is a bad idea, suggesting you should go ahead with this financial move even if it might come back to haunt you.
Ramsey is wrong to close old credit cards
The main reason most experts advise against closing old credit card accounts is that it can hurt your credit score. And Ramsey’s blog acknowledges that’s a problem. “When you close your credit card account, your score will drop a bit, but only for a short time.”
The reality, however, is that depending on your situation, closing your old account may have a bigger impact than it suggests and the impact could be long term.
You 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, the amount of credit you use compared to the amount you have, and inquiries that are placed on your credit report when you apply for credit. new 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, your average credit age will be shorter and this hurts your score because a long history of responsible borrowing is better. You will stop developing a positive payment history once your card is unopened, and eventually the card will drop your credit report, which means you will lose the history of payments made on time 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, let’s take a simple example.
Let’s say you have two credit cards, each with a $1,000 limit, and you charged $500 on one card and nothing on the other. If you close the account with a $0 balance, your credit utilization rate is $500 used out of $1,000 available (50%) – and a high utilization rate hurts your score. But if you doesn’t close your old account, your ratio would be $500 to $2,000, which means you’d only be using 25% of the available credit (anything over 30% lowers your score a bit).
Ultimately, there is no reason to close old credit cards and hurt your credit score which could be substantial. Even if you don’t want to use your cards much anymore, you can bill them for a streaming service each month and set up automatic payments so you don’t have to worry about debt, but can still build a credit file that can open doors. for you in the future.