If youve been struggling with revolving debt or youre just tired of having so many pieces of plastic in your wallet, then you might be thinking about canceling a few of your credit cards. Well, before you take that plunge, you should first consider the consequences of canceling one of your lines of credit.
Although calling your creditor and telling them that youre breaking up seems easy enough to do, closing a line of credit even one you havent used in 10 years can and will have a significant impact on your credit score.
Heres a breakdown of all the reasons why:
Youre Erasing Your Credit History
Credit assessment agencies like Fair Isaac consider the length of time that youve been using credit to be a major factor when determining your credit score. Although you might have a high score now, if you cancel your oldest open account then your score is going to be re-calibrated, which is another way of saying its going to be lowered.
Youre Also Altering Your Credit-to-Debt Ratio
Another big factor in determining your credit score is your credit-to-debt ratio. This ratio is calculated by comparing the amount of money you owe creditors with the number of accounts that you currently have open. If you cancel a card that’s carrying a balance, you’re removing one of your open accounts while keeping your total debt the same, and that altered ratio is going to hurt your rating.
Youre Always Canceling with a Balance
Although most consumers take the term credit balance to mean the amount of debt they carry over between billing periods, a balance is really the history of spending on your credit card. If youve ever made a purchase on a credit card that youve tried to cancel even if you paid that purchase off on time youre still carrying a balance on a canceled card, and that means a solid ding to your credit score.
While canceling a credit card will always lower your credit rating and never raise it, there are certain times when the ding your score takes is worth reducing the amount of plastic you carry around. If youve got more than three credit cards to your name or you think you might be a compulsive spender, then its not always a bad idea to bid your card issuer farewell.
However, if youre planning on buying a home or a car in the next year, you should keep those accounts open. Although a 30-point ding to your credit rating isnt hard to recover from, it makes a big difference to lenders. You might be stuck with a 7% interest rate for a home loan rather than a 6% rate and that could translate to tens of thousands of additional dollars on a 15-year mortgage. Instead of canceling, take your card out of your life temporarily by freezing it in a block of ice or sticking it in a jar of peanut butter. Seriously, it works.
In the end, its up to you to decide whether canceling your card is worth the risk or not. If you do decide to trim some of the fat in your wallet, make sure to cancel the newest cards first, and always always pay off all of your debts before cutting the cord.