Now, I'm not saying you should never close a credit card. If you find a lower rate card, or one with better rewards (and the credit limit of the new card is equal to or more than the one you are closing), or you can raise the limits of existing cards to cover the credit limit shortfall it might be worth taking the minor hit to your score caused by reducing the age of your credit history. Just be careful, as a lender may access your credit report and generate a hard inquiry, which can have an additional impact on your score.
If a card is used fraudulently and your bank doesn't cancel the card and issue a replacement, you should definitely close it immediately. If your relationship is breaking up, and you share a joint credit card with your partner, close the account. Otherwise, you will remain responsible for any excesses or late payments by your ex. If you never use a card that charges a high annual fee, closing it might make sense — but think about it first. There are other examples, but the general rule of thumb is: keep those accounts open.
Even if you have a perfectly valid reason, simply closing a credit card could hurt your credit score. Here are three ways to minimize that damage and speed your credit score's recovery:
1) Close the right card. Avoid closing the card you've had the longest, with the highest credit limit and the lowest interest rate and fees. Store credit cards tend to come with high fees and low credit limits, so consider closing those.
2) Pick the right moment. Closing a card immediately before applying for a loan could cost you in higher interest payments. Don't close it until after the loan is approved.
3) Manage your ratio. First, request a higher credit limit from the cards you have left. (Again, be careful, as this may generate a hard inquiry. You can ask the credit card company rep if this is their practice.) If you are planning to close a credit card account, you should pay down balances on your remaining cards as well, since those balances may drag down your score.
Finally, Dave Ramsey to the contrary notwithstanding, don't fall into the trap of avoiding credit altogether. Credit is an asset. It can help you attain your goals, including buying a home, a car and achieving financial security.
It's a good thing to pay down debt, but once it's gone and you can breathe normally again, if you wish to resist temptation, shred your credit card, put it in a safe deposit box or give it to your mother (and make her swear she won't use it) — just don't close the account.
Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.