As you try to get your finances under control, you might be considering cutting up some of your credit cards. After all, by destroying the plastic beasts, you won’t be able to continue adding to the debt you have already accrued.
Sally has three credit cards. The first card has a credit limit of $5,000 and she has an outstanding balance of $2500. On her second card, she has a $2,000 limit and a $1,000 outstanding balance. On the last card, she has a $10,000 limit and a $5,000 limit. When all is said and done, Sally has a total revolving credit of $17,000 and a total debt of $8,500 – exactly half of her available credit.
Credit rating agencies provide more favorable scores to those with a lower percentage of debt-to-credit ratio. Ideally, you should owe no more than 30% of the credit you have. In this case, Sally is already looking less-than-perfect since she is already at 50%.
If Sally decides to transfer her outstanding balance to one credit card and cancels the one she transferred from, her debt-to-credit ratio becomes even worse and hurts her credit score further.
In addition, Sally could be hurting her score even further if the card she canceled was in good standing for six months or more. Just this small amount of time is long enough to build a solid credit history with that creditor, which reflects positively on a credit score. Remember, once a card is canceled, all of the credit history you built with the card is canceled as well.
So, before canceling a credit card, look into your debt-to-credit ratio and make sure it won’t put you at a ratio of more than 30%. Hanging onto the card just might be a good idea – just look for other ways to prevent yourself from giving in to temptation and spending with the card.
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