Credit Score and Credit History- How long have you had the account in question? Credit history accounts for 15% of your credit score. When you close an account the history is lost as well which can cause your credit score to drop. As if losing your credit history is not enough, you should also know that closing accounts increases your debt to credit ratio. When you combine both factors your credit score may drop significantly. Lenders will still be able to view the history of the account on your credit report but it will no longer be included in credit score calculation. Remember other lenders use your credit score to determine the risk of doing business with you. If you are perceived as a high risk, you will pay dearly in higher interest rates and premiums.

Debt Elimination- Closing credit card accounts will not magically erase the debt that you owe. In fact you cannot truly close an account that has a balance remaining. You can however close your account to future purchases. When you close a credit card account that has a balance your available credit will automatically be reduced to $0. Unfortunately your balance remains which means your credit card account will appear maxed out until your balance is paid. For this reason you should carefully consider your options before closing an account which has an unpaid balance.

Fraud Prevention- In many cases consumers want to close unused or inactive accounts to lower the risk of identity theft or credit card fraud. This is a valid concern since these types of fraud are on the rise recently. Before closing an account, carefully consider the pros and cons of closing the account. Are their other ways you can decrease the risk of fraud? Which option will cost you more money in the long run? If you feel strongly that closing an account is the best course of action, carefully consider which account(s) you want to close. Try to pick the account(s) which will have less of an impact on your credit.

Closing credit card accounts can have a significant negative impact on other areas of your life. There are few situations where the benefits outweight these negative consequences. As the economy struggles to pull out of a recession consumers must make every effort to reduce debt, increase saving and improve credit ratings.

Understanding the basic principles of personal finance such as budgeting, money management, and investing is required to survive financially. The current state of the economy should serve as a warning that families cannot continue to live beyond their means. The economy will recover and families will get back on track eventually; hopefully the lessons learned will not soon be forgotten.