Should you cancel that credit card?
It is a common situation for U.S. consumers to find themselves in -- too many credit cards taking up space in their wallets. For many cardholders, the decision to cancel a credit card or two they don't use anymore seems like a no-brainer, at least until they hear what many financial experts have to say. Often, these experts suggest it is a bad idea for consumers to cancel an existing credit card account.
The most frequently used argument against canceling a credit card involves the consumer's credit score. By canceling one of more credit cards, the argument goes, your credit score will likely fall. Since a credit score is used for everything from determining the interest rate on borrowed money to whether you get approved for a loan, that number is very important in this day and age.
Canceling a credit card does in fact impact your credit utilization ratio, which in turn may effect your credit score. If you have five open credit card accounts with a total available credit line of $50,000 and an outstanding balance across all five credit cards of $10,000, your credit utilization ratio is 20 percent.
Let's say you then choose to cancel two of your credit cards, dropping your total available credit line to $25,000. You would also be increasing your credit utilization ratio to 40 percent, and potentially lowering your credit score.
Another argument against canceling a credit card has to do with age. Not your age, but the age of your credit card account. Your credit score is also bolstered by demonstrating a long credit history. So if you decide to cancel a credit card you have used for some time (particularly if you used the old credit card responsibly), you will be shortening the length of your credit history.
However, those who argue in favor of canceling credit cards highlight the importance of feeling in control of your credit situation, something that can be difficult when you have more credit card accounts open than you can keep track of.
These individuals suggest that unless you are on the edge credit-wise and need every point to support your credit score, taking a temporary hit to your score is worth the satisfaction of canceling a credit card you don't need or want anymore. Of course, since timing is everything, you probably should not cancel a credit card just before a lender plans to check your credit history (such as when applying for a mortgage). But otherwise, eliminating some stress from your life by canceling a credit card is a smart decision, they say.
Meanwhile, you can help your credit score by always paying bills on time and avoiding excessive debt, since those two factors together make up 65 percent of your credit score (35 percent and 30 percent, respectively). In comparison, the age of open credit lines accounts for 15 percent of your score and the frequency of applying for new credit accounts for 10 percent of your score. (The remaining 10 percent is based on various other factors, such as the types of credit used).
In the end, only you can decide if canceling a credit card feels like the right decision. As long as you arm yourself with the proper knowledge, you will be in a good position to choose whether you need all of your existing credit cards or not. And, should you need a new credit card, consider the wide variety of products available at CreditCards.com.
Updated: August 18, 2009
- New credit card has so-so terms? You have choices – If the rate is too high or the credit limit too low, you have more options than just sitting and fuming ...
- How cohabitating couples can protect themselves financially – Taking these three steps before moving in could help avoid a money mess down the road ...
- 4 wrong money messages for kids (and 4 right ones) – Parents unknowingly teach their kids unhealthy money habits, but they're fixable ...