The Benefits of Canceling Credit Cards with High Balances

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    History

    • Although credit cards might seem to be a new concept, the marketing of credit cards can be traced as far back as the 1800s. Initially, credit cards were issued by specific institutions and could only be used with that merchant. They were designed in order to keep customers coming back to the same store, building customer loyalty. In 1946, a banker named John Biggins created a bank card that was known as "Charg-It." If a customer purchased something with the Charg-It card, the bill was sent to the bank run by John Biggins, who would pay the merchant and then collect from the customer. Naturally, only customers of Biggins' bank could use the Charg-It card.

    Function

    • The function of the credit card is to allow an individual to purchase items or services while not carrying cash. Individuals sometimes acquire high balances by not paying attention to their spending habits. In most cases, the best way to use a credit card is to pay off the balance within a thirty-day period, thereby avoiding any interest charges put on the balance. One of the main benefits to canceling a credit card with a high balance is the savings that takes place in interest charges.

    Types

    • There are two kinds of credit cards---"open-loop" and "closed-loop." An open loop credit card (such as MasterCard and Visa) allows banks to process both kinds of cards, whereas a closed loop credit card (such as American Express, Diner's Club and Discover) are closed loop, meaning that they set the rules and regulations and fees for how much they can charge and which businesses can accept them. Maintaining a high balance on either an open-loop or a closed-loop credit card is not financially advisable.

    Warning

    • When canceling a credit card with a high balance, it is important to understand that there might be some consequences on a credit report. Credit scores are based on the amount of available credit that an individual has as well as the amount of credit to which an individual has access. When a credit card with a high balance is canceled, the amount of credit the card holder can access is reduced and that makes for a lower credit score.

    Potential

    • One potentially positive alternative to canceling a credit card with a high balance is to transfer the balance to a different card, preferably a card with a lower interest rate. Many credit card companies offer a promotional period where they allow for a transfer at a reduced interest rate for one to two years. When an individual transfers the high balance, they can save on their monthly payments.

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