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The Truth About Cancelling Credit Cards
If you've thought about cancelling a credit card, think again. More often than not, closing a credit card, used or unused, will do more harm
than it will good. That's because credit cards have such a large impact on your credit score - the number that tells how good or bad your
credit is. Cancelling the wrong credit card could hurt your credit score.
How Credit Cards Influence Your Credit Score
Credit cards impact your credit score in a few ways. Your credit utilization, which is 30% of your credit score, compares your credit
card balances to your credit limits. If your balances are too high relative to your credit limits, your credit score will drop. Closing
a credit card causes your credit limit to drop to $0. If you still have a balance on that card, then your credit card appears to be maxed
out, your credit utilization goes up, and your credit score falls.
Your credit score is also influenced by the amount of time you've been using credit cards. Length of credit is 15% of your credit score. The longer you've had credit, the better your score will be. Closing a credit card takes it completely out of the "age of credit" part of the credit score calculation. If you close a really old credit card, your credit score will drop because your credit history now seems to be younger than it really is.
Mix of credit is 10% of your credit score. Having experience with different types of credit - credit cards vs. loans - boosts your credit score. If you close the only credit card account you have, you could lose points in that area of your credit score.
Reasons Not to Close a Credit Card
Closing a credit card doesn't remove it from your credit report, though. And any negative payment history from the last seven years
will still influence your credit score. So, avoid closing a credit card simply because your credit card issuer won't cooperate with
you. You're not hurting the credit card company at all.
When Cancelling a Credit Card is the Right Thing
When it comes to your credit score, there is seldom anything to be gained by closing out credit card accounts. You may have some personal
gain, though. For example, if you have a credit card with a high interest rate, you might sever ties with that credit card if you can get
lower rates from another credit card. But make sure the card you close doesn't have a balance and that it's not your oldest card. Otherwise,
you could just leave the card open, use it periodically, and pay the balance in full whenever you make purchases.
Compulsive credit card users might close some or all their credit card accounts to remove the temptation of running up debt. Credit score aside, closing credit cards in this case is actually better than leaving them open. You'd do more damage to your credit score by running up debt you can't afford than you would if you closed a credit card with a balance. After all, you'd pay off the balance at some point and your credit score would then recover from the increase in your credit utilization.
The Right Way to Cancel a Credit Card
When you decide that cancelling a credit card is the right thing, don't just cut it up. Instead, call your credit card issuer and let them
know you're going to be closing out your account. Follow up with a letter confirming your request. Finally, check your credit report to make
sure any comments about the account state it was closed at your request.
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