No More American Express Gift Card Inactivity Fees

Here’s some good news if you happen to have American Express gift cards in your purse or wallet.

The credit card issuer said it will no longer charge the monthly service fees associated with the gift cards going forward.

This includes those already purchased, those in stores now, and those headed to market for the upcoming holiday season; unfortunately, it doesn’t look like they’ll be reimbursing those of us that got hit with the fees in the past.

American Express used to deduct $2.00 per month a year after purchase for inactivity and $5.95 to replace a lost or stolen card.

The company says it’s now the only major issuer of universal or “general purpose” gift cards to eliminate all fees after purchase.

American Express gift cards now have no fee for activation, checking a balance, monthly servicing, or for card replacement; and the funds never expire.

However, the company does charge anywhere from $2.95 to $6.95 to purchase a gift card, which is still a bit of a downer.

It seems American Express made the move to connect with the top mall retailer, Simon Property Group, in order to be their primary gift card provider.

American Express gift cards will be available for purchase at 70,000 retailers in the U.S., including supermarkets, shopping malls, drugstores, and also online.

Sales of American Express gift cards have already exceeded $1 billion; imagine what all those inactivity fees amounted to…

Credit Card Defaults Hit Record High in August

The credit card carnage is far from over, as evidenced by a recent report from credit rating agency Moody’s.

Credit card defaults rose to a record high in August and delinquencies increased for the first time since March.

Early-stage delinquencies, defined as those 30-59 days late, jumped to 1.65 percent from 1.41 percent.

Loans at least 30 days late increased to 5.8 percent from 5.73 percent, while charge-offs climbed to 11.49 percent from 10.52 percent.

Credit card defaults have been on the rise thanks to surging unemployment and the diminished benefits tied to tax returns, which have since come and gone.

Moody’s expects the credit card sector to begin to recover in mid-2010 when charge-offs peak between 12 and 13 percent.

Banks and card issuers typically charge-off (write it off as a loss) credit card debt after six months without collection.

Credit card issuers have been closing millions of accounts since the crisis got underway a couple years ago; credit limits have also been slashed for millions of card holders to mitigate risk.

This has led to a great deal of concern over whether cut credit lines lower credit scores, though a recent study by FICO found that those who had lines cut at no fault of their own didn’t see a related drop.

Those with negative information tied to a credit score cut were more likely to see a decline in their credit score; makes sense.

Tip: How to avoid late credit card payments.

Chase Slate Credit Card Review – Get a No Fee Balance Transfer!

The “Chase Slate” credit card is popping up a lot on the Internet, so I thought I’d take a look at what this new credit card actually offers.

It’s branded as a type of credit management card, using Chase’s Blueprint technology, which allows cardholders to manage financing terms on their own.

Cardholders have the ability to pay certain items (like everyday bills) in full each month, while splitting off more expensive one-off purchases like appliances, TVs, computers, etc.

These high-ticket items can be separated on your statement so you know the associated balance; you can also set a time frame for paying them off by using a goal date or specified monthly payment.

For example, you can pay off groceries and gas in full each month, while putting $50 towards your new plasma TV each billing cycle.

The same can be done for you entire account balance; if you want it all paid off by a certain date, Chase will do the math for you to ensure you stay on track.

These features obviously don’t make much sense for the cardholder who makes payments in full each month, and if anything, may promote carrying a balance.

The APR is the same for all purchases so it’s somewhat arbitrary, but I suppose a breakdown of what you owe could motivate cardholders to tackle debt faster and/or make a better plan.

It also provides a daily snapshot of your purchases so you know where you’re spending the most money.

Chase Slate Offers 0% APR for 15 Months on Purchases & Balance Transfers

The Chase Slate credit card comes with 0% APR fixed for 15 months on purchases and balance transfers, assuming you qualify for elite and premium pricing.

After the initial promotional period, APR ranges from 13.24% to 22.24%, depending on your level of credit.

There is no annual fee associated with the Chase Slate credit card, and you can execute balance transfers for free!  The only notable charge is a $39 over-the-limit fee.

“Chase Blueprint” is available at no charge for all Chase Freedom, Chase Sapphire, Slate from Chase (formerly Chase Platinum), Ink from Chase, and other business cards.

To sum it up, paying credit card debt in full each month is optimal, but this credit card assumes you’ll carry a balance.

If you have trouble managing your debt and must carry a balance, it could be a good option, though you’ll have to compare the APR and associated finance charges with other credit cards as well.

This is probably an effort by Chase to both promote carrying a balance while also pushing the cardholder to pay it down, a tricky endeavor to be sure, but a profitable one assuming it works.

Chase Slate No Fee Balance Transfer!

A huge credit card deal just got released today. For a limited time (it’s unknown how long), you can get your hands on a no fee balance transfer credit card via Slate from Chase.

As long as you transfer your existing high-rate balances during the first 60 days your account is open, you will pay NO balance transfer fee! That’s right! Zero dollars to transfer an existing credit card balance.

(After the 60 days are up, the balance transfer fee rises to the industry standard 3%, with a minimum charge of $5.)

And yes, this Chase Slate offer comes with 0% APR on balance transfers (and purchases) for a full 15 months. This makes it the only 0% APR no fee balance transfer on the market at the moment.

There are a few other no fee balance transfer credit cards out there, but they don’t come with 0% APR, which kind of defeats the purpose of executing a balance transfer.

So if you’ve got high-APR credit card balances, this deal can save you a ton of money on costly credit card finance charges. It’s a great way to get out of debt quickly at the lowest cost, zero.

Once the 0% APR period ends, the APR will rise to a variable 11.99%, 16.99%, or 21.99% rate. So it’s best to pay off the entire transferred amount during the 0% promotional APR period to avoid interest altogether.

Quick example to highlight the potential savings of Chase Slate’s No Fee BT offer:

Existing credit card debt: $5,000 @19.99% APR
Balance transfer fee: $0
Balance transfer APR: 0% for 15 months

In the first year alone, you’d save roughly $1000, or $83 a month by going with this balance transfer deal. So it’s pretty much a no-brainer if you’ve got existing credit card debt. And there’s no annual fee! Try saving that much by clipping coupons…

If you don’t know what a credit card balance transfer is, learn more about them by clicking the preceding link. They’re simple to execute and can save you a ton of money, while simultaneously getting you out of the credit card debt cycle for good.

Back in the day, I didn’t know what a balance transfer was, and approached them very cautiously. I always figured they were just another scam that credit card issuers tried to force down our collective throats.

But I quickly discovered that it was a great tool to pay off my credit card debt (yes, I racked up a lot of debt after college) and avoid paying interest without any funny business.

Tip: The average credit score approved for the Chase Slate No Fee offer is 730, which is considered great credit. The lowest score approved was 566, all according to stats from Credit Karma. In other words, you’ll want to have good credit prior to applying for this offer.

So there it is. If any other Chase Slate special offers pop up, I will be sure to add them here for all to see.

(photo: mikewilson)

More Credit Cards Going to Consumers with 760+ Credit Scores

So far this year, newly issued credit cards have increasingly been going to consumers with the highest credit scores.

According to credit bureau Equifax, two in five new credit cards issued in 2009 went to consumers with credit scores of 760 or higher, which is considered excellent to most financial pundits.  In fact, Suze Orman kind of called this a few years back.

While still not the majority, it’s up from one in five new cards back in 2007, meaning credit card issuers are raising standards for prospective card holders.

Equifax found similar trends in other types of lending, including auto loans; and we all know mortgage lenders have raised minimum credit requirements as well.

Over the past year, credit card issuers have cut the number of outstanding cards by 82 million, or 19 percent, while reducing credit limits by $721 billion to a collective $3.6 trillion.  Talk about some spring cleaning and then some.

This illustrates the importance of good credit going forward, which may make you wonder what credit score you need to get a credit card these days.

Keep in mind that though standards have risen, the average credit score of Americans has dropped thanks to all the financial turmoil, so don’t fret too much.

If you continue to practice healthy credit habits, such as paying bills on time, keeping balances low, and applying for new credit in moderation, you should be just fine.

For the record, a 760 credit score is well short of the highest credit score, which is 850 for Fico scores.  Learn more by taking a look at my credit score range.

Tip: How to raise your credit score.

Absolutely Free Credit Report with No Trial Required

If you’re looking for an “absolutely free credit report with no trial required,” there’s really only one place to go.

The credit bureaus offer this type of free credit report with absolutely no strings attached at, as required by federal law.

I say no strings, but that doesn’t mean they won’t bombard you with advertising once you do order your free credit report.

Picture e-mail after e-mail urging you to buy a credit score from them. Pretty clever how they created a great marketing channel for themselves after they were forced to hand out free credit reports to consumers.

Credit Report Sans Credit Score

Okay, enough of my rant. While it is absolutely free, no trial, no sign-up, no credit card needed, no nonsense, it doesn’t include a free credit score, so it may not be what you’re looking for.

Most consumers don’t even know how to read a credit report, so their interest lies in that ever-powerful three-digit credit score.

But having free access to your credit report, even if it doesn’t include the credit score, isn’t a bad thing.

You get all the information you’d get on a typical credit report that you’d have to pay for (or at least sign up for via a free trial) without all the hassle.

With, you’re limited to one credit report from each of the 3 major credit bureaus once per year, so you can order all three at once, or spread it out through the year so it’s staggered.

Keep in mind that information is reported differently amongst bureaus, so be sure to track all three if you want the complete picture.

Start with the Free Credit Report

Personally, I like to start with a free credit report to determine if a paid or trial credit report complete with credit score is actually necessary.

If I don’t see anything derogatory or fishy on the initial credit report ordered, I can get a fair estimate of my credit score using my handy credit score range as a barometer (what is a good credit score?).

Warning: When signing up for the absolutely free credit report via the government website, watch out for attempts by the credit bureaus to charge you for a credit score or “more access.”

Be sure to click on the “no thanks” tabs when prompted, usually below the oversized print telling you to sign up for full access. =)

Update: You can now gain free access to your credit report (based on TransUnion data) via Credit Karma. The company that brought you free credit scores now offers free credit reports as well, which are currently in beta.

Their so-called “full credit report” displays an overview of your credit profile, along with your open and closed accounts, balances, payment history, and more.

You’ll also be able to view employment history and any public records, as well as recent credit inquiries and collection activity, if applicable.

Overall, it’s a nice tool to go along with the federally mandated free credit report. I like that I can check it periodically throughout the year as opposed to ordering one free report annually, or every 4 months via the three different bureaus.

When it comes to credit reports, it’s important to get timely information. The downside is that the data only comes from one credit bureau, so it could still miss some things.  But then again, the credit reports via are also per bureau as well, it’s just that you can order all three.

For the record, my full credit report from Credit Karma seems to be pretty accurate. All my accounts are listed, even fairly new ones. Check it out if you’ve got a CK account.

What Credit Card Has the Best Rewards?

Here’s a bit of a subjective question: “What credit card has the best rewards?”

The answer to this question is easy. Drum roll please…

The best credit card available is…the one that provides you with the most benefits. That’s it. We’re done. See you later. You can stop reading this now.

Okay, I’m being dramatic, but honestly, there isn’t a single “best credit card” out there.  You see, like many other things in the world, the “best” of something is very often subjective, meaning it depends on who’s asking and who it’s for. Timing is also a concern.

For me, the best credit card is generally one that provides me with the most cash back. Why? Because I want cash back above all else. I don’t care about travel rewards or any other specialty rewards most of the time, though the Chase Ink sign-up bonus and redemption options are pretty stellar (and I’ve taken advantage of them).

I also don’t need a 0% APR credit card because I pay my credit card balance in full each and every month. So the credit card APR has no bearing on my decision.

Additionally, I have an excellent credit score, so I can apply for whatever credit card I want and actually get approved!  Also, because I have good credit and don’t need a specialty rewards card, I don’t need to pay an annual fee.

My Personal Favorite Rewards Credit Card

Without thinking for more than a second, I can tell you that the original Blue Cash card from American Express has the best ongoing rewards (in my opinion). And that’s the kicker.  It has the best rewards for me.  And perhaps you, but it all depends on what you’re looking for.

You see what I’m getting at? I found a credit card that was tailored for my needs, with my best interests in mind.  I didn’t just Google “best credit card” and make my decision based on some top 10 list or what someone else said.

When deciding for yourself, first determine what you need most out of your credit card. Is it cash back, customer service, a low interest rate, a specific rewards program, a balance transfer credit card? What is it!

Once you’ve got that narrowed down, you can begin your credit card search.  The second step should be determining what credit card you’re actually eligible for. In other words, what is your credit score and is it high enough to successfully apply for the credit card you’ve got your eye on?

It is recommended that you check your credit scores before applying for a credit card to determine your chances (It won’t hurt your credit score).

After all, if your FICO score is sub-600 and the credit card in question calls for “good credit,” there’s not much reason to apply.

You’ll simply be adding a credit inquiry to your credit report, which will likely push your credit score even lower, at least short term.  So see where you stand, determine what you need, and keep narrowing it down.

It Has No Annual and Offers 5% Cash Back All Year Long

Most importantly, the Amex Blue Cash is a cash back credit card with no annual fee, so you don’t have to pay to get those so-called rewards that you may never earn or use.

Secondly, you get cash back, so your rewards are guaranteed not to go to waste; if you opted for an airline miles rewards card, such as the Capital One Venture Card, or a basic rewards credit card, the related rewards could expire or you could be forced to use them for something you’re not really interested in.

Additionally, the cash back card from American Express can be used to offset your credit card balance, meaning redemption is hassle-free. Every year I convert my points to statement credits and enjoy a really cheap monthly credit card payment.

Other rewards programs require you to redeem your points for merchandise or travel, and may have blackout or expiration dates; you’re usually also paying for those rewards annually, so whether they make sense financially is questionable as well.

Aside from the benefits of the automated system, the Blue Cash card comes with the best cash back rates to boot; 5% cash back on groceries, 5% cash back on gas, 5% at drugstores, and 1% cash back everywhere else.

There’s also no limit on the amount of money you can earn, so the savings can be pretty substantial if you’re a big spender.

One final thing I’ll say on this subject is that while I feel the Blue Cash Everyday Card has the best rewards, a combination of credit cards could prove more beneficial.

Do You Need More Than One Rewards Credit Card?

For example, certain credit cards offer higher cash back rewards in certain categories, such as travel, gas, groceries, entertainment, and so forth.

The Costco American Express card gives you 3% back on gas and 2% cash back at restaurants, so it may be wise to have that as well if you’re a Costco member and you eat out often (there’s no annual fee, just the standard Costco dues.)

By carefully choosing which credit card to use in specific situations, you may actually be able to maximize your rewards; this of course, takes a bit more legwork.

Remember, the credit card with the best rewards may be unique based on your own situation, so consider what you want/need personally before making a choice. What works for one person may be not work for another based on personal spending habits.

After all, a gas rewards credit card is useless for someone without a car.  And travel rewards won’t do anything for someone who hates to travel.  So find a credit card that matches up with you!

Upfront Bonuses May Trump Standard Rewards

Lastly, an upfront bonus may outweigh the longer term benefits of a certain rewards credit card.  Case in point, the Chase Sapphire Preferred credit card, which comes with $400 cash back after you spend $3,000 in the first three months of card membership. Or $500 towards travel if you use it for such. Some tailored offers even come with 75,000 bonus points upfront, which is worth as much as $900!

Most rewards credit cards would require you to spend somewhere in the ballpark of $25,000 to $90,000 to earn that much cash back.  For most people, that’s probably much more than their budget allows, and not a wise spending plan to earn a little cash back.

There’s also the Chase Freedom $300 cash back offer, which you can earn after spending just $500.  That’s a great deal, especially because there’s no annual fee.

So be sure to look all available credit card offers to see which is the best fit.  You may find that the combination of an upfront bonus, along with two other credit cards for specific rewards may be better than just one all-purpose rewards credit card.

All that said, there isn’t just one single credit card that offers the best rewards. It’s kind of like when you order a hamburger or a pizza and all your favorite toppings are spread among three different options, forcing you to add the items you want for an additional charge or miss out entirely.  Usually I add bacon.

Fortunately, you can hold several credit cards at once and take advantage of the many rewards programs that exist.  Just be sure to manage your cards properly so you don’t miss a payment.

Read more: Check out what I think about all the major credit card companies.

Which Credit Card to Pay Off First?

And now the age old question. “Which credit card to pay off first?”

Pay the Credit Card with the Highest APR First

Well, the short and obvious answer would be to pay the credit card with the highest interest rate (APR).

After all, your credit card with 21.99% APR is costing you more than your credit card with 9.99% APR, so it’d be wise to dedicate more money to the former one.

Again, it’s best to pay off the credit card with the highest APR, not the highest balance; don’t get these two confused.

There seems to be a lot of debate over this seemingly simple question, and that has more to do with emotions than math, because it’s always going to be the higher APR credit card first. Period. End of story!

However, for some people, it may be easier to compartmentalize debt into different buckets and pay it off accordingly. The general idea is to set a goal to pay off one account by “X” date, then tackle a subsequent account once that’s done.

This is fine if you want to pay more interest, or if you think it’ll help you reduce your debt quicker and thereby translate to less interest paid, but it relies on psychology over logic.  So beware.

Snowballing Debt

Another method, popularized by financial “guru” Dave Ramsey, is known “debt snowballing.” The idea here is to pay off smaller debts first, and then work your way to the bigger debts.

So if you have three credit cards with outstanding balances of $500, $1,000, and $2,000, you’d make minimum payments on the two larger balances, and devote as much as possible to the smallest balance.

Using this method, you should be able to eliminate the smaller debts quicker, which provides some sort of psychological resolve, thereby making it easier to manage your outstanding debts.

Apparently this motivates the individual to keep paying off debt thanks to the short-term “wins” associated with paying off a credit card.  But again, this is all mental, and not necessarily the most cost-efficient way of getting it done.

Create a Plan

So the solution to our question may be a relatively easy one, but getting out of credit card debt isn’t, so you need a plan.

The best way to tackle credit card debt is to make a list of all your credit cards, balances, APRs, minimum payment amounts, and so forth.

Then tally up all the minimum payments so you know exactly how much is due each month (this can fluctuate).

Without question, you must make at least the minimum payment on each credit card, as you won’t want any extra fees added on or related credit score dings for failing to make on-time payments.

[How are credit card payments applied to balances?]

Once all the minimum payments are accounted for, use whatever extra money you have available (for the purpose of paying down debt) to make a larger payment on the credit card with the highest APR.

This way you focus on the card that is contributing the most to your debt burden, while keeping the rest at bay.

It’s not wise to pay each card down by the same amount or attempt to pay off the entire balance on a card with less debt and a lower APR just because you want to “get it out of the way.”

Some “experts” seem to think this is a good way to deal with debt from a psychological standpoint, but in reality you’re simply throwing away your money.

A better recommendation would be to ask for interest rate reductions. You’d be surprised what simply asking will get you these days…if you can lower the APRs on your credit cards, you’ll be even closer to being debt-free.

Also, if you don’t have too many open credit cards with large balances, you may be able to open a new credit card and consolidate the balances on a low APR credit card.

A credit card balance transfer could help you move that high-interest debt over to a 0% APR credit card or a low fixed rate credit card. It’s a simple way to reduce finance charges significantly and get out of debt a whole lot quicker.

In summary, instead of relying on emotion, take the time to do the math so you wind up making a wise decision that will put your emotions at ease.

Read more: How to calculate credit card interest.

Are Credit Card Cash Rewards Taxable?

Another frequently asked question that comes up in the credit world: “Are credit card cash rewards taxable?” Often, this question heats up around April, right before taxes are due.

And with all the cash back rewards credit cards around these days, it’s no wonder consumers are concerned that they may be taxed for things like free airline tickets and cash back rewards.

Credit Card Rewards Aren’t Income

When it comes down to it, you are taxed on income you make. But credit card rewards aren’t considered income, and are in fact a type of rebate; the credit card issuers even refer to them as such.

American Express lists their cash back reward under fees and adjustments, so again, it doesn’t appear to be income.

If you think about it, by electing to use your credit card to make purchases you could be making with cash or a debit card, you are receiving a price reduction or discount from the card issuers.

While it’s not as direct as normal rebates or coupons, which typically come from the manufacturer, it draws enough parallels to be treated similarly.

Additionally, the cost of the items we buy is higher because of the existence of credit cards.  If it weren’t for credit cards, everyday goods would be cheaper because merchants could charge us less.  Why? Because merchants pay costs involved with accepting credit cards, and that cost gets passed on to consumers.

So we’re essentially just getting our money back by using credit cards.  And not even all of it, just some of it. Those who pay with cash instead of credit card simply lose out as a result of the higher prices.

So you shouldn’t worry about paying taxes on credit card rewards, as they’re just a discount/rebate you receive for using your credit card.

Unfortunately, the IRS hasn’t made it 100% clear if this is indeed the case, so questions and worries still persist.

I did a search over at the IRS website and couldn’t find anything that addresses the question specifically.

Upfront Credit Card Bonuses Aren’t Taxable Either

While that’s all good and well (for the most part), there are different types of rewards offered to cardmembers. For example, a big thing these days is the opening bonus used to lure in new customers.

Take the $100 welcome bonus offered to new Blue Cash Everyday cardholders, or the big bonuses offered to Chase Sapphire Preferred cardholders. Because these are “sign-up bonuses,” and not traditional credit card points or rewards, the tax rules get even more murky.

But again, these opening bonuses are treated as rebates because the consumer must spend money to obtain them. For example, both opening bonuses cited above require a minimum spend in order to receive the cash bonus.

If you don’t meet the spending requirement, you don’t get the bonus, i.e. rebate. Also note that many credit cards accompanied by big upfront cash back bonuses carry annual fees.

So again, you’re paying a fee to get the rebate in the first place, and the credit card issuer probably expects you to pay them more than they pay you in the long run via fees and interest.

The IRS Wants You to Earn Credit Card Points!

Funnily enough, the IRS actually promotes the use of a credit card to file taxes electronically, and notes that you could even earn miles, points, rewards or cash back from card issuers!

Heck, if they’re saying so, it must be a safe tax-free move.

That’s the way I’m treating it unless I hear otherwise, though I would expect an advisory regarding the topic in the near future as rewards become bigger and more commonplace.

As always, it is recommended that you consult your accountant or tax advisor to be 100% certain any and all credit card rewards aren’t taxable to avoid any surprises.

Charitable Donations Using Credit Card Points Aren’t Tax Deductible

One more thing while we’re on the subject of taxation.

Some of the major credit card issuers such as American Express, Bank of America, and Citibank now offer donations to charity as a way to redeem points earned through the use of their credit cards.

While this sounds like a very humane and generous option for credit card holders, it should be known that the contributions made to charities using credit card points cannot be deducted from your taxes.

Unfortunately, by law it is the credit card issuer who is deemed the one donating, and thus only they can deduct the tax. If you’re looking for a way around it, exchange your credit card points for cash value, then write a check to the charity of your choice.

Aside from losing out on the tax-deductible benefit of donating via credit card points, you’ll also be paying an arm and a leg to donate a small amount. A simple $50 donation will cost anywhere from 5,000-6,000 points.

And if you use your own money, you’ll get a wider selection of charities to choose from, as opposed to the relatively small number offered by the credit card issuers.

Related: Paying your taxes with a credit card.

Should I Close My Credit Card?

More credit Q&A: “Should I close my credit card?”

So you’ve decided you don’t want your credit card anymore. You don’t use it and it just sits around in your wallet. Either that, or you’ve got spending habits that are out of control and you just want to pay off the credit card and close the account. After all, you already cut up the card, might as well close it too, right?

You decide to make the phone call to close the credit card account. You contact customer service and ask them to “cancel your credit card.” They place you on hold for a while, then transfer you to the appropriate department. You speak with a specialist regarding the closure of your card.

They ask a few questions, such as why you’re closing the account, were there any problems, etc. You say no and just try to rush the process along. After throwing some special offers your way, they finally concede and tell you the closure request has been processed and should be taken care of and noted on your credit report within 30 days.

But before you go through with it, it’s important to understand the implications of canceling your credit card.

Implications of Canceling Your Credit Card

First, if you plan on applying for any new credit shortly after or during the time of credit card closure, note that your credit score will likely drop as a result of canceling the credit card.

You will essentially lose out on “x” amount of available credit that the canceled credit card was contributing to your credit utilization ratio.

So if your now-cancelled credit card had a credit limit of $10,000, that’s $10,000 less that you have available. That diminishes your borrowing power, and drops your credit score, at least in the near term.

Not only that, but you’ll effectively reduce your credit depth by canceling a credit card that may have had several years of positive credit history associated with it. Remember, most lenders want at least three open lines of credit with two-year history on each.

So if you only have new credit cards, you may run into trouble in the future when applying for a car lease or a mortgage.

Secondly, if you cancel your credit card with a balance outstanding, the creditor can charge you a penalty or raise your interest rate to the maximum available. So be sure you want to cancel the card before you tell any of the credit card representatives about your intentions. And make sure you have the money to pay it off in full.

If you aren’t carrying a balance, the opposite is true. Tell the creditor that you plan to cancel your credit card and watch the offers get thrown at you. Many creditors will offer lower APRs, better rewards, card upgrades and more, just to keep you as a client!

Even if you plan on keeping your credit card, making a veiled threat is a great way to improve your benefits. Just make sure you don’t have a balance, or you could be penalized as mentioned above.

It’s Okay to Close Your Credit Card Account

Lately, I’ve been getting agitated by all the media attention surrounding credit scores and the negative impact of closing a credit card account.

It seems every article out there detailing the latest credit card woes, such as cut credit lines and increased minimum payments, also warns customers about closing their accounts, as if it’s credit score demolition.

I wanted to address this issue because there are a lot of people out there that make it seem like you should never, ever close credit card accounts.

Unfortunately, this seems to benefit the credit card issuers more than consumers; after all, if we can’t close our credit card accounts, there’s a decent chance we may use the cards in the future and run into trouble.

Let’s get real for a minute here; if you don’t use a certain credit card and you’ve got numerous open accounts with positive credit history on them, it’s okay to ditch a credit card or two.

In fact, I recently closed two credit card accounts that I hadn’t used in a year, as I had about six other active credit cards.

Sure, my available credit will drop as those lines of credit are no longer at my disposal, and my credit utilization rate will rise as well.

By keeping credit card accounts open, you keep the history of the card active, and the available credit balance is counted in your overall credit profile.

But this isn’t always a negative. You see, I’ve got plenty of good history on my other credit cards and I keep balances low to nil, so it’s not a concern for me.

And hey, even if I hadn’t closed those credit card accounts, they may have closed anyways by the card issuers themselves. Chase actually closed one of my credit card accounts without notifying me, presumably for complete inactivity for several years.

I didn’t really care. In fact, they saved me the trouble.

When It Could Hurt Your Credit Score

Now let’s look at the other side of the coin; if you don’t have much credit history or you’re in the process of (or plan to) apply for a loan, it’s best not to tinker with your credit card accounts. At all…

Closing a credit card account can lower your credit score for reasons I mentioned above, so it’s best not to mess with it during crucial times like applying for a mortgage or auto loan.

Many mortgage lenders require prospective borrowers to have 3 active tradelines with a two-year history on each. Imagine if you had three, but closed one recently. And were then denied a loan.

It’s also not advisable to close a credit card account if you’ve only got one or two, as you may need those accounts to build positive credit history, or heck, buy lunch.

Similarly, if you have credit cards with years of history, it’s probably best to keep them open and active, and close newer, less valuable accounts with little payment history.

Your credit score can actually take a hit if you’ve got too many credit cards (why is my credit score low?).

So if you think that might describe your situation, and you’re interested in closing one or two, start with the ones with the least amount of history, or perhaps the ones with the most negative information.

Tip: You can recycle your old credit and close your card after.

Let’s Set the Record Straight

I think it’s gotten to the point where Fair Isaac, the creator of the FICO score, should step in to address the matter. They should at least tell consumers it’s okay to close their accounts, and that the impact will be relatively minimal if they have other accounts with decent associated credit history.

Obviously, if you’ve got only two credit cards and one is maxed out and the other is free and clear, it’d be wise to keep the latter one open so it doesn’t look like your entire credit profile is maxed out.

But if you’ve got seven credit cards, five of which are free and clear, it’s okay to close a few. Cancel away…it shouldn’t hurt your credit much or at all. And even if it does, it should be temporary, because it’s not a “negative” event like a missed payment.

Tip: If you have limited credit history, keep your credit cards open, and try to link each one to a monthly payment you make, such as a cell phone or cable bill. Then pay it off in full each month. This will keep the card active and build positive credit history.

Even if the APR is high and you’ve got low interest credit cards that you normally use, it can still benefit your credit score.

Just understand that you do not need to carry a balance to improve your credit score!

Key Takeaways About Closing Your Credit Card Accounts


  • It’s okay to close your credit cards!
  • It will have some kind of credit score impact, but it could be minimal
  • Closed accounts mean less available credit, which can hurt your score
  • Closing credit cards with larger credit limits can do more harm
  • If you’re paying off the debt while closing the account, it can help you
  • Closing older cards can hurt more because it shortens your average credit age
  • Closing a credit card while your other cards have balances can be more harmful
  • Thinner file consumers (less credit history) will likely be impacted more negatively
  • Get documentation when closing an account because there have been cases where the cards are never actually closed!
  • Also note that the credit cards can generally be reactivated within six months of cancellation
  • Closed credit cards remain on your credit report for 10 years


Keeping Credit Cards Open Can Be Helpful

I personally recommend keeping credit cards open if they’ve got decent lines of credit, no annual fees, contain lengthy clean payment history, and don’t have outstanding balances resulting in finance charges.

The total amount of available credit and the card history are good enough reasons to keep the card open.

If you wish to pay off a card or avoid paying finance charges, try a credit card balance transfer. This allows you to keep the credit card open, pay it off completely, and avoid interest charges as you move it to a new, 0% APR credit card.

That being said, don’t be afraid to close a credit card if you’ve got too many and they’re not being used. Sometimes too many credit cards can lower your credit score and may increase your identity theft risk if not properly managed.

Read more: How many credit cards should I have?

How Are Credit Card Minimum Payments Calculated?

Let’s address the following timely question: “How are credit card minimum payments calculated?”

Since the credit crunch hit, credit card minimum payment requirements have been going up as card issuers attempt to tighten their grip on borrowers’ spending habits.

Instead of letting them run up hefty credit card balances, they’re requiring card holders to pay down balances more quickly to limit their liability.

These changes seem to be targeting those with large balances who have done little to pay them down over the years (see Chase raises minimum payments on credit cards).

Especially those with balance transfers that pay nothing more than the minimum payment.

So how does it work?  Like all questions related to credit cards, it depends on the card issuer, as they all set different rules.

One general rule you can count on is that issuers will use a certain percentage of your outstanding credit card balance, such as one or two percent, as the minimum payment.

So let’s look at an example:

Outstanding balance: $2,000
APR: 15%
Minimum payment: 2% of balance

If we take the 15% APR and divide it by 12 months, we get 1.25%, or $25 of $2,000, but we’ve still fallen short of the minimum payment requirement of two percent.

So you tack on the remaining 0.75%, or $15, making the minimum payment $40 in this example.

If we break down that $40 minimum payment, $25 is going towards finance charges, or interest, while the remaining $15 goes towards the principal balance, or what was actually spent on purchases.

As you can see, making just the minimum payment is a losing proposition, as it’s mainly credit card interest that is paid each month, while the overall credit card balance drops marginally.

If the finance charges happen to be more than the 2% minimum, some card issuers may ask you to pay all the monthly finance charges plus a certain fixed amount on top of that, such as $15, so some of the principal is actually paid off.

Card issuers also typically have a minimum amount that must be paid regardless of the size of your balance, such as $15, assuming your balance is too low.

For example, 2% of a $500 balance is only $10, so you’d need to pay an extra $5 to meet that minimum payment requirement with some issuers.

For 0% APR credit cards, there is a similar minimum payment that must be paid, as no interest is due.

Typically, any one-off fees, such as over-the-limit and late fees must also be paid as part of the minimum payment.

Contact your individual card issuer to inquire about how credit card minimum payments are calculated, as they vary and may change from time to time.

Keep in mind that if you only make the credit card’s minimum payment each month, you’ll pay a lot more in interest and it’ll take a lot longer to pay down balances.

It’s recommended that you pay more than the minimum each month to avoid unnecessary finance charges (how to pay off credit card debt?).

And while some may complain about card issuers raising minimum payment requirements, it’s actually a benefit to customers because it means less interest in the long run.  But for those just scraping by, it’s obviously not a welcome change.

Making More than the Minimum Payment on Your Credit Card

When the new credit card rules go into effect on February 22nd (Credit Card Bill of Rights), perhaps one of the most exciting changes will be the way payments are allocated.

In the past, credit card issuers applied payments over the minimum payment to balances with the lowest APR because it worked in their favor.

Let’s look at an example:

Total credit card balance: $5,000
Purchase balance: $3,000 @ 18% APR
Balance transfer balance: $1,500 @ 0% APR
Cash advance balance: $500 @ 20% APR

In the scenario above, credit card issuers would apply any extra payments to the balance transfer balance set at 0% APR.

That would leave the balances subject to the highest APR and their associated finance charges untouched, effectively costing cardholders more money.

It wouldn’t be until that $1,500 balance transfer balance was paid off before the purchase balance and finally the cash advance balance would be paid down.

The shady practice meant big money for credit card issuers, and never-ending debt for struggling cardholders.

Fortunately, lawmakers said enough was enough, and stamped out the so-called negative payment hierarchy business once and for all.

Payments Beyond the Minimum Attack Highest APR Debt First

Going forward, the reverse will be true when you make more than the minimum payment.

So in the example above, any extra payment(s) will attack the cash advance balance first because it has the highest APR, and thus the costliest finance charges.

The last balance to be paid down will be the balance transfer amount set at 0% APR, which benefits cardholders because it’s not accruing any interest whatsoever (at least during the promotional period).

The rule change is good news for credit cardholders looking to pay down debt; of course, it should have always been this way, but better late than never.

Just note that those still only paying the minimum payment will continue to see their high-APR balances paid last, so it’s now more important than ever to pay a little bit extra each month.

Read more: Should you pay your credit card in full each month?