What does closing credit card accounts do to your life? Some pretty popular financial-advice gurus instruct people to close all of their credit card accounts, and any other type of credit account. The reasoning is that it will help people control their spending and get out of debt. Whenever someone points out that it harms people’s credit scores, the leaders dismiss that and assure listeners that no one needs a credit score anyway.
I listened to that advice. We shut down every account in the early 2000s. While much of what those advisors say is great, this particular nugget couldn’t have been worse. We found out the hard way that the statement that “you don’t need a credit score” was absolutely untrue.
Look out when closing credit card accounts
Your credit score drops like a brick in a well. It doesn’t get any better, even though you’re not adding any more debt. Your score doesn’t stay where it was, either. It plummets. Overnight.
I’ve heard at least one popular speaker say that people should not worry about that, but in real life, that attitude only works for millionaires. People in lower income brackets have to get jobs, a place to live, a bank account, insurance. They also might need to turn on utilities or rent a car. Every one of those things is affected by their credit scores.
You can be denied every one of those things because of a score that is too low. I know from experience. My husband and I have been denied every one of those things, directly due to closing our credit card accounts.
Unfair treatment, incorrect assumptions
Our insurance rates nearly doubled because we chose to close the accounts. When I asked why, they told me that people who have bad credit have been proven to be horrible risks and that every insurance company does that, whether they will admit it to their customers or not. Actuarial tables rule all. We’ve had to pay extremely high deposits/fees for everything else, such as water, electric, gas, and Internet, even though they told us that the only “reason” they had to do that was our credit score.
More than one potential employer denied me a job solely because my credit score was too low. I would never be able to work in the banking industry or retail, because those industries require people to have high credit scores (and I’ve heard that some others do, too, although I haven’t researched that). It’s a good thing that I’m self employed and love what I do.
Renting a car without a credit card
We have been denied rentals because of it, both auto rentals and apartment/house rentals. When we rented a car, we also had to pay a $500 deposit simply because we did not have a credit card. The deposit was twice as much as the rental fee. We had more cash in our hands at the rental counter than we even needed to rent the vehicle for a week. That didn’t matter. We were prepared to pay for the entire week in full, up front, but that didn’t make any difference, either.
The manager of the Enterprise said, “Sorry. No dice.” Of course he cited “corporate policy” many times. After two days of struggling with them and gathering utility bills and proof of income and bank statements and whatnot, and paying a $500 deposit on top of paying for the rental in advance, we finally were allowed to rent a car, but not the one we wanted. Oh, no. The lowest-value car on the lot. Because that’s all that people who don’t have a credit card can be trusted with.
Anyone who does not have a major credit card has to jump through many hoops and pay an exorbitant deposit and be mortified in public, because no matter what a guru says, a debit card is not accepted at Enterprise (the only car-rental agency in town).
Again, the assumption is that if you do not have a credit card, it is because you cannot have a credit card, which happens only to people who are not trustworthy, to people who don’t pay their bills, to people who are “horrible risks.”
Closing credit card accounts may be financial suicide
Shutting down all of your accounts is close to being the worst financial mistake a person can make. Telling someone to do that is like telling someone to chop off his leg—possibly advisable for someone who is about to die from exsanguination due to a horrible crushing injury and an amputation is her only hope. It’s certainly not advisable for someone who just needs some stitches to stop their bleeding.
According to the advice-giving celebrity we listened to, we never had a spending problem, we simply had an income problem. He still told us to close every account. I think that even those who do have spending problems can find a much less damaging way to solve them than amputation.
Closing credit card accounts benefits the people who prey on those who are poor and/or broke. (I think there’s a difference between those two.) Here’s just one example.
A story of a low credit score
Jerica needs to rent a place to live and she is denied a rental in four different places, all because her credit score isn’t high enough. She’s always paid her bills on time, so that’s not why it’s low. It’s low because she believed that closing her accounts was the way to get out of debt.
When she finally does find a place that will accept her (a dump in a bad neighborhood), she finds out that due to her low credit score, she has to pay the highest level of deposit for every one of the utilities. Not wanting to be homeless, and not having a few grand to spend, Jerica goes to a payday-loan place to get the money for all of those deposits. Why? Because having utilities is a requirement of her lease—and so is renter’s insurance, for which she now gets to pay 1.3 times as much as anyone with a decent credit score.
*This story is fiction, but not by much! We actually did have the money on hand and we paid the insane deposits (a low-credit deposit is sometimes nonrefundable, by the way).
Cut up the cards, keep the accounts?
I am all for cutting up the cards, or even for using them like a debit card or envelope system. People allocate a certain amount for spending, and that is all they spend. The bill is paid in full. I don’t think it’s wise for the vast majority of people to actually close the accounts. We were charged “non-usage fees” for not using the cards while we were paying them off. It would have been worth it to keep paying them just to have those accounts open. But we didn’t know that then.
Shutting down credit card accounts is great for people who can afford to pay double the deposits and who don’t need to get jobs or a place to live, and who can afford to “self-insure.” It is a nightmare for the rest of us, and it’s a nightmare that everyday people might not ever wake up from. We closed the accounts in 2003, and we are still dealing with the fallout.