Have you thought, “Should I cancel my credit card?”
If you’re thinking of cancelling or closing out a credit card account, put down your scissors and read this first. There are many factors to take into account before you cancel a credit card – timing, how it will affect your credit score, and how you will appear as a lender are just a few.
Are you thinking of closing a card because you just have too many? Sometimes these cards can sneak up on you, and before you know it your wallet is bulging with unused pieces of plastic. If you have more than one card that you do not use, you can probably cancel a card with a small limit without a lot of damage to your credit score. One part of your credit score is the ratio of debt to credit on your cards – for example, if you have a high limit on all cards but keep the balances low, then you have a low ratio of debt to available credit. It is advised to keep the ratio around 20-25%. Cancelling a small-limit card will not change the ratio as much, especially if you have many cards. If the card you cancel is one of the only ones you have, however, the ratio will be affected more. For example, if you have a combined total of $5000 on credit cards, with a balance of $2000 your ratio is 40%. By cancelling a card with a $1000 limit, you now have $4000 of available credit with the same balance of $2000, which increases your ratio to 50%. In this case, it might be advisable to increase the credit limit of a card that you are keeping, to bring the ratio down to a more manageable level. If you are the type of person that carries a small balance on your cards, say $1000 with the above $5000 of available credit, your ratio is 20%. By taking away $1000 of credit, your ratio only increases to 25%, which is still within a reasonable percentage.
When you cancel a credit card is also an important thing to consider. Because it will affect your credit score, you may not want to cancel one immediately before being qualified for a loan. On the other hand, if you have multiple cards and this one will not make a major impact to your ratio, closing it out may in fact be a wise move. The amount of credit cards you carry is also a factor that is considered when you are asking for more credit. Owning numerous credit cards at all times, whether you use them or not, is somewhat undesirable. It is better to manage just a few credit cards to keep your credit score as high as possible. Also diversifying the types of credit you have – credit cards, mortgage, line of credit, etc – is a way to build your score up. So, remember to think of your future potential borrowing needs when deciding whether to cancel a card. Is this the right time to do it, or should you wait a few months? If you decide to wait, you can simply pay off the balance and not use the card until you decide it is the right time.
If you have had a certain card for many years, it is probably one you want to hold on to, whether it has a low balance or not. The amount of time you have been able to keep a credit card and build credit is a factor in your credit score as well. If the choice is between a card you’ve had for years and one that you’ve recently acquired, with all other factors the same, hold on to the older card. With that being said, don’t constantly open and close new credit accounts without expecting a hit to your score. If you are always closing new credit card accounts, you may not be seen as someone who should be taking on more credit.
One of the ways you can mitigate some of the credit score damage is by either opening up another credit card, or increasing the balance on one of the cards you currently carry. Keep in mind the debt ratio though, as well as your tendency to spend money on credit cards. If you are the type to rack up money on a card simply because it is there, getting more credit will only do you more harm than good.
In short, there are many things to mull over before you call your credit card company and close an account. Every situation is different, based on your overall credit history, credits and debts, and the length of time you’ve been accumulating credit. Consider how each thing will affect you, and the time in which you want to do it, before taking the final step. And if you come to the realization that you don’t want to cancel a card but you’re also afraid you might use it, stick it in the freezer in an ice block to take away the temptation!
The best way to keep a good credit score is to keep a low balance on just a few cards, pay them off, and diversify your types of credit. However, often this advice might come too late. In that case, it is a matter of deciding which is your better option – keeping or cancelling that card – and looking toward your future spending to minimize credit score damage.