A friend recently told me that she was not sure if she would re-apply for her credit card as the expiration date was nearing. There is a lot wrong with that statement, and it showed me how many misconceptions exist about credit card accounts.
Card vs. Account
A credit card is a piece of plastic (or metal) that gives a merchant easy access to bill your account. That is all it is. You can even have multiple cards for the same account.
Your card is tied to your account by a card number. That card number is usually the same as your account number, but not always. For example, if you lose a card or have fraudulent activity on your card, you will get a new card number. That does not mean you are closing your account and opening a new one.
The important thing to understand is that your credit card and your revolving credit are attached to each other, but the account lives on even if something happens to the card.
Card Expiration Dates
Your credit card always has an expiration date. That date is the date the card expires. Your account will never expire. Unless you close it or the bank closes it, your account will live on forever.
When your card expires, your account does not close. You do not have to re-apply. You do not have to renew. You do nothing at all. Your new card will automatically come in the mail to replace your old card. That is all that happens.
Remember, your account lives forever. Your card is just a way to access your account.
Keep Your Accounts Open
When your new card arrives, just activate it and use it in place of the old card. Your habits should be the same. You should never close a credit card account unless one of the following scenarios arises.
Replacing Card with Annual Fee – If you have a credit card with an annual fee and you are not going to use it anymore, go ahead and close it.
Accounts with Negative History – If you screwed up bad and have an account that shows missed and late payments, you should close it after you have a new card to replace it. The history of that account will be on your credit report for seven years, so you might as well close it and start the cycle to drop the account.
You Have a Serious Spending Problem – If you can’t control yourself and will spend more than you can afford to pay off in full each month, remove the temptation.
Outside of those two scenarios, I can’t think of a single reason to close an account. Your credit score is based on a handful of data points. Two of those are open revolving credit dollars (you want a lot of available credit with low usage) and average age of accounts (older accounts show a good history of responsible use). Raise your credit score by keeping your accounts open.
Credit Score Questions?
I used to work in a bank and underwrite people for loans. I was trained on how credit cards and credit scores work. I even used to be the guy that would approve new accounts. If you have any questions, feel free to ask them in the comments.
Image by JD Hancock on Flickr