Wondering if you should cancel your credit cards?
If you have old cards that you no longer use or that you’ve misused, cancelling your credit card can seem like a smart fix to improve your credit. Many people assume that by cancelling a credit card, you get rid of the debt history of that card. And if your card has just been sitting in your wallet for years collecting dust, you’ve probably thought of getting rid of it. But the truth is- you may not actually want to cancel that card.
Why Shouldn’t You Cancel It?
Contrary to popular belief, cancelling a credit card can actually damage your credit score.
For one, old credit cards lengthen the age of your credit history. Your credit history is one of the factors lenders use to determine your credit score. The longer you have used credit, the better your score will be. If you cancel an old credit card, even if you no longer use it, you are deleting history from your account. As a result, it will look like you have been using credit for less time than you actually have. This has a negative impact on your credit score. Even just taking 1 or 2 years off your credit history can affect your score.
Another thing lenders use in determining your credit score is your credit utilization. This accounts for one of the largest chunks of your score. Your credit utilization is the ratio between how much you spend and your credit limit. Experts advise to keep this number as low as you can, while still using your credit cards. When you have high credit utilization, you continually spend close to your credit limits, and your credit score can drop. When you cancel a credit card, that credit card no longer factors into your credit utilization. So, it looks like your balances are much closer to your limits, resulting in a damaged credit score. Even if you don’t plan on using your credit card, having $X amount of credit gives you a much higher credit limit. Getting rid of this card ensures that your credit utilization ratio will get higher and your score may suffer.
Furthermore, many consumers assume that they should get rid of cards with late or missed payments or other debt problems. However, these things will show up on your report regardless of whether or not you cancel the card. If you have a late or missed payment, you can expect it to be on your credit report for 7 years. Cancelling your credit card will not get rid of this history.
Are there ever any reasons you should?
Why do you want to cancel your card? If the only reasons you have are because you don’t use it often or you made a late payment once, don’t cancel it. If keeping your card is possible, you probably should. Keeping your card, even if you don’t use it often, guarantees that your credit score won’t drop due to bad credit history and credit utilization.
But there are certain times when it is best to cancel. It is important to do what’s best for you so you don’t hurt your credit score even more. For instance, if you have credit problems and you know that a credit card will tempt you to max out, it might be a good idea to close the account. It’s better to take a small hit to your credit score than a massive one by getting into more debt. Or if you have a card with a high annual fee or a high interest rate that’s hurting you more than helping you, you may consider closing the account.
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- Should you close credit card accounts that you are not using?