How Does Canceling Unused Credit Cards Affect a Credit Rating?

Although canceling credit cards will reduce the temptation to spend beyond your means, it will also affect your credit rating. In fact, canceling certain credit cards will be detrimental to your credit rating, lowering it by a significant amount.

Significance

One metric that credit bureaus use to determine your credit score is debt-to-credit ratio. Canceling credit cards will lower this ratio, causing the credit-scoring algorithm to drop your credit score.

Time Frame

Credit bureaus also use length of credit history to determine your credit rating. Canceling your oldest credit card will reduce the length of your credit history, harming your credit rating.

Considerations

It is better to pay off credit cards and keep them active rather than have them canceled. If you must cancel a credit card, cancel the most recent one. Additionally, if you want to cancel a card, look to eliminate a card with a high annual fee, rather than one with no or a low annual fee.

References

• The Motley Fool: Don't Cancel That Credit Card
• Bankrate.com: Should You Cancel an Unused Credit Card?
• Bankrate.com: How Credit Scores Work, How a Score is Calculated