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Credit card issuers are always trying to find ways to entice new sign-ups, from offering introductory 0% APR periods to hefty rewards bonuses. Sometimes they roll out richer-than-usual bonus offers on rewards cards around the holidays to appeal to shoppers wanting more bang for their buck. If you use these cards properly, they can be very rewarding. But once the holiday season ends, should you keep the account open or close it?
There are benefits and drawbacks for both options, so here are the questions you should ask yourself before you make your decision.
Does the Card Provide a Financial Benefit?
Say you opened this credit card account because you wanted to score an introductory bonus, such as enough airline miles to get a free round-trip flight. Bonus offers for miles, points or cash back usually require you to hit a spending threshold within a set time period.
But looking beyond any introductory bonus offers, would this card continue to provide value for you moving forward? For example, if it's a cash back card that offers high rewards tiers for spending categories you use often, like gas or grocery shopping, you could benefit year-round if you use the card strategically.
Or maybe it's a travel card loaded with other perks that could come in handy beyond the holidays (and once the pandemic ends), such as free checked baggage, complimentary lounge access and priority boarding. If you can continue to make use of the card's rewards or benefits, and you trust yourself to spend responsibly, it could make sense to hang onto the card.
Will Keeping the Card Open Tempt You to Spend?
Speaking of spending responsibly: We all have different money habits, and exercising restraint is easier for some than others. Are you the type of person who can stick a credit card in the back of your wallet or desk drawer and forget about it, or will having that account open tempt you to buy things you wouldn't otherwise?
If you have the discipline to use that account wisely, then it could be worth keeping it open. But if you worry you'll be tempted to spend impulsively with plastic, it might be safer to cancel the account after the holidays.
Is There an Annual Fee?
Some credit cards demand an annual fee in exchange for their generous rewards programs. These fees commonly range anywhere from less than $50 to several hundred dollars for high-end rewards cards. Some issuers waive the fee the first year, but others charge it from the start. These fees can be outweighed by a card's reward incentives, but not always, so it's worth doing the math to figure out if the rewards offset the fee for you.
If the card you opened has an annual fee and you've already paid it for the first year, it might make sense to keep it open to make sure you get your money's worth. If there's an annual fee you won't pay until the second year, consider how much value you'll get out of the card and whether the fee will justify keeping the account. If you find you like the card but don't want to pay the annual fee, consider contacting the issuer to see if there's another, similar card without an annual fee they could switch you to. This is called a product change and may or may not work depending on the issuer and the cards available.
Are You Likely to Need It Later?
Let's say you have a small financial emergency, like a dead car battery or unexpected vet bill. Can you get by without this credit card, either with savings or other lines of credit? If not, your new credit card might serve you well down the road, and it's probably wise to hang on to it for later. And even if you don't think you'll be needing the card for future purchases, you might still hang on to the card just in case, as long as it doesn't carry a hefty annual fee.
Keep in mind that if you apply for new credit cards frequently, you look riskier to lenders and it can temporarily lower your credit score due to several factors. Rather than closing your new card only to end up applying for another one later on, it's better for your credit to keep this account open and just use it sparingly to keep it active.
Be Sure to Consider How Credit Cards Affect Your Credit
As you think through the factors listed above, there's a benefit to keeping a card account open that you should keep in mind: its impact on your credit scores.
Credit cards affect your credit score in several ways, the most important being payment history, which accounts for 35% of your FICO® Score☉ . If this is your only credit account, using the new credit card to contribute to your history making on-time payments could greatly help your scores. As long as you make all your payments on time and avoid carrying a high balance, your new account can help you show lenders you know how to manage credit responsibly.
On the topic of high balances, another important factor is your credit utilization ratio, which accounts for 30% of your FICO® Score. This ratio indicates how much of your available credit you're using. Carrying a high debt load makes you appear risky to lenders, so it's usually advised to keep your total utilization below 30%.
Whenever you add a new credit card to the mix, you increase your amount of available credit. As long as you maintain a low (or zero) balance on this new account, simply keeping the account open can help improve your credit utilization ratio, which can strengthen your credit score. If you ditch the card, your overall credit limit goes down. Depending on how much debt you carry on other cards, this could cause your credit utilization to spike and potentially harm your credit score. In other words, if you're actively trying to improve your credit, or you're planning to apply for a loan in the near future, keeping the account open could be beneficial. If your credit is already in great shape and you're not concerned about your utilization shifting drastically, then canceling may not impact you very much.
Weigh the Pros and Cons Before Closing a Card
Whether you should keep this new account open after the holidays is ultimately a personal decision that comes down to your spending habits, your credit score, your financial goals and the potential future benefits of the card.
If you want to keep tabs on how this new account has impacted your credit, either positively or negatively, you can get your free credit report and scores from Experian. Plus, when you sign up for free credit monitoring, you can gain a better understanding of how your credit card accounts and spending decisions shape your credit in the short-term and the long-term.