Think Before You Cancel That Credit Card

If you’ve been struggling with revolving debt or you’re 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 you’re breaking up seems easy enough to do, closing a line of credit – even one you haven’t used in 10 years – can and will have a significant impact on your credit score.

Here’s a breakdown of all the reasons why:

  • You’re Erasing Your Credit History

    Credit assessment agencies like Fair Isaac consider the length of time that you’ve 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 it’s going to be lowered.

  • You’re 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.

  • You’re 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 you’ve ever made a purchase on a credit card that you’ve tried to cancel – even if you paid that purchase off on time – you’re 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 you’ve got more than three credit cards to your name or you think you might be a compulsive spender, then it’s not always a bad idea to bid your card issuer farewell.

However, if you’re 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 isn’t 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, it’s 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.