Some people that find themselves working with credit counselors, advisors and money gurus will sometimes get the feeling that the only answer they arrive at for solving their debt issues is canceling credit cards. This is a very misguided belief that can bring about the creation of new, worse habits when dealing with money and this kind of drastic action can do more harm than good when it comes to your credit score. Keep reading about more of the facts that come into play if you’re considering canceling credit cards.
Balance-to-Limit Ratio Really Matters
30% of your FICO credit score is tied to your utilization rate, or your balance-to-ratio limit. This means that you never want to have a very high balance on your credit card. Say that you have a $5,000 limit and your current balance is sitting somewhere around the $4,800 range. This illustrates a very high ratio of your balance to your credit limit, and your credit score will definitely drop for this reason. Canceling credit cards will set your available balance to zero and send your ratio off-kilter. In reference to your credit rating, the best idea to handle credit cards that are into the upper limit ranges is not to start canceling credit cards: just discontinue using them and start paying down the balance and interest as soon as possible. Over time, the available credit on the card will increase and your FICO credit score will get a nice boost.
Canceling credit cards straightaway might serve some positive psychological needs for certain people, but from a credit perspective you’re only hurting yourself in the process by doing so. You score will suffer for a while and you might develop even worse habits with credit cards and money in general.
Your Unfavorable Payment History Still Stands
Even when you start canceling credit cards thinking you’re saving yourself some stress, the payment history tied to your credit card will still stand in reference to your FICO credit score. This means that while a good payment history will of course help your score, a bad payment history will still affect your credit score negatively even after the account has been closed out. If you have various lines of credit open, each different payment history will constitute 35% of your overall FICO credit score. The impact that a closed account’s payment history has will decrease with time because it will eventually fall off of your report and no longer affect your score.
Negative payment histories usually stay in play for about seven years and positive payment histories stay intact for about ten years.
The Length of Your Credit History Helps and Hurts
Fast track your thinking to ten years after you’ve closed a credit card account. It’s about the time that a positive payment history is about to fall off and no longer be a valid indicator of your credit history, so your FICO credit score is going to change in one of two ways. The length of one’s credit history constitutes about 15% of your overall credit score. You can only be hurt by a positive payment history falling off of your credit report if this was the oldest account you had on your credit report because it will cause your length of credit history to be recalculated: and it will with no doubts come out shorter in length without your longest-standing positive history.
As long as the positive payment history that’s falling off of your credit report isn’t your longest-standing positive history or it’s only the oldest positive history you have by a year or two, you won’t lose too much benefit of its age when it “dies out”.
A Good Mix of Credit Looks Good
If you’re planning to cancel your only credit card, you will certainly hurt your FICO score. A mix of diverse credit types will do the most good for your credit score and that criteria will make up about 10% of your FICO score. Only when you have a mix of about seven credit accounts will your score begin to be negatively affected, so canceling credit cards and other lines of credit that are newer and more superfluous would be ideal at this time. Even if you’re meeting payments and building positive payment histories on all of your accounts, you’ll begin to see negative effects down the line.
At most, three to four credit cards and lines of credit should be more than enough, so long as you’re keeping all of your balances very low.
In most cases, canceling credit cards will give off a neutral or negative change but there is at least one instance that can create a positive change. Make sure to keep in mind the best way to close a credit card account before doing so and remember: taking control of your credit score and credit cards can be easy as long as you have a good strategy in place.