Is It Bad to Cancel Your Credit Cards?

If you've ever been in credit card debt, you know that nothing feels better than paying off that last payment and getting rid of your credit card. However, canceling those cards may not be in your best interest. Canceling credit cards can affect your credit score in a number of ways, some of which may not be positive.

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Credit cards may only be canceled if they are paid in full. Some companies will also allow users to preemptively cancel their credit cards if the company decides to raise their interest rates. The account is frozen, and the remaining balance must be paid off at the original interest rate. As soon as the balance is paid, the card is canceled.

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Credit card companies may also cancel customers' accounts for non-use.To prevent this, make sure to use any credit card that you would like to keep open at least once every few months, just so that there is regular activity on the card. Any purchase, no matter how small, will keep your account active.

Effects

The most immediate effect of canceling a credit card is that it reduces the amount of credit you have available. This in turn raises your credit utilization ratio, which is a major factor in determining your credit score. For instance, if you have two credit cards that have $5,000 limits, you have $10,000 in available credit. If you have a balance on one card of $1,000, you are using 10 percent of your available credit. If you cancel one of those cards, you only have $5,000 available credit, so you are now using 20 percent of your available credit. Keeping your credit utilization ratio below 25 percent will help keep your credit score high.

Considerations

Closing a credit card can also affect the length of your credit history, another major player in the credit scoring equation. If you have one card that is 20 years old, and the rest of your accounts are only 2 years old, closing the 20-year-old account will have a major impact. Additionally, canceling a credit card account can reduce the diversity of accounts on your credit report. The credit scoring formula gives high points to people who have a variety of credit accounts (mortgage, credit card, store card, gas card, car loan), so if you close a card that added diversity to your credit profile, that may hurt your score.

Warning

Leaving your credit card accounts open (but unused or rarely used) is the best way to preserve your credit score. However, people who have accrued deep debt with credit cards and who do not trust themselves to stop using them should cancel them once they are paid off, no matter what the effect on their credit score. Having a slightly lower credit score is much better than being tempted to go back to thousands of dollars in debt.

Resources

• Credit Cards.com