Answer: This is one of those "it depends" answers. The reason closing credit card accounts can hurt your credit score is because one of the factors that goes into a FICO score is the ratio of the amount of debt you have to the amount of credit you have been approved for. It's best if these two numbers are as far apart as possible. Lenders don't like to see you near your credit limits. When you close accounts, you are reducing the second number, the amount of credit available to you, so that changes this "credit utilization ratio."
If you have an excellent credit score, lots of other open credit accounts and you're not about to apply for a big loan for a home or car, go ahead and close credit cards that are threatening to charge you a dormancy fee. (If you are in the market for a mortgage or auto loan, wait to close accounts until after you have closed on the loan.)
"The damage done to your scores from closing a single account is likely to be minimal and you'll soon recover," says Liz Weston, the author of "Your Credit Score, Your Money and What's at Stake."
If, on the other hand, you are currently trying to improve your credit score, you should avoid closing accounts or giving the card companies an excuse to close them. (Many companies are going beyond charging dormancy fees and actually closing unused accounts.)
Many experts say you need to use a card at least once per quarter to avoid having it closed. That's a pain to keep track of, so Weston suggests this strategy: "Set up some kind of automatic charge on a card you want to keep, like a utility bill, and then arrange for the total to be automatically debited from your checking account each month."
Comment: My wife purchased your book for me for our 5-year anniversary. This is one of the best and most up-to-date resources I have seen. I had learned a lot on my own. I wish I would have had it sooner. I have another possible way to save big that was not mentioned. I saved big -- $1,300 -- last year through credit card rebates. The net from the card company actually paid my Christmas gifts!!! I researched that the average family spending according to the 2007 consumer expenditure survey would lend to a minimum of $500 in credit card rebates.
Answer: Yes! Cash back credit cards are a fantastic way to "save" money, in this case by making money. I had actually written an entire chapter on this strategy for my book, SAVE BIG, but we cut it out of the final manuscript since it wasn't a strict example of "saving." This "deleted scene" is available for free on my Web site for those who are curious. But here are the main points.
If you're fortunate enough not to carry a balance on your credit cards, it's time to get the richest rewards card you can find. The type depends on your lifestyle. For example, if you travel a lot by plane, a frequent flyer mile card is good for you, and typically mileage rewards are more generous than cash back offers.
If on the other hand, you are unlikely to redeem airline miles or other trinkets some cards offer, go for cash back. I have another one of my savings makeovers coming up this week on "Good Morning America" and I recommended a cash back card to that family. I calculate they will "save" (or earn) $1,599 a year in cash back with their new card based on their current spending! It can be a real benefit that requires zero effort on your part.