If you’re wondering whether canceling a credit card could hurt your credit score, this is an important article for you. Many people are understandably confused about this area and are right to ask how or why such a thing could be financially harmful.
After all, your objective is probably to clean out the clutter in your credit file and enhance your financial reputation. You would think that creditors and the credit rating companies would reward you, right?
Unfortunately, the reality is that canceling a credit card could hurt your credit score. It has to do with your credit utilization percentage. Now if your eyes just glazed over, don’t worry. I’m going to slowly walk you through what this means and how you can use it to your advantage.
Is It Bad to Cancel a Credit Card?….An Example
Let’s say that you have 5 credit cards with the following credit limits and outstanding balances owed to creditors:
|Credit Card||Limit||Amount Owed|
To calculate your credit utilization percentage, you would divide the total amount owed by the total available credit. So in the above example, the credit utilization percentage would be ($2850/$7500 = 38%)
Now, let’s rework the above example with a couple of tweaks. Of course, you’re going to make payments on the cards and incur new charges. But let’s keep the numbers the same so that you can easily understand the point.
Let’s say that you’ve decided to close the accounts for credit cards number 4 and 5. Perhaps one is a retail credit card that you haven’t used in years and the other is a second Visa card that has a very high interest rate. There are a lot of reasons why someone might want to cancel a card. But if we walk through the numbers again, here’s what the table would look like after those two accounts were closed.
|Credit Card||Limit||Amount Owed|
And here’s what the revised credit utilization percentage would be — ($2850/4500 = 63.33%).
By cancelling two credit cards with zero outstanding balances, your credit utilization percentage would increase by more than a whopping 25 percentage points! Ruh Roh!
So any creditor that checks out your credit file would see that you’re using over 60% of your available credit. That could be significant enough to hurt your credit score or cause a denial.
You can easily calculate your credit card utilization percentage, and determine how much it would change if you cancelled a credit card. The information needed to do it is reported on your monthly statements. If not, call your credit card company.
But also keep in mind that this is only one factor that goes into determining your credit score. Nevertheless, it is an important one. You can learn more about all the credit score factors by reading our article…FICO Credit Score Boosters
So what all this should mean to you is that you shouldn’t be too quick to close a bunch of credit card accounts at the same time. I would certainly recommend that you keep the accounts open for any credit cards that you’ve had for many years and the payment history is positive. That’s because this is something that can help your credit score. Just cut up those specific cards and forget about them, without formally canceling them.
But if you have your heart set on getting rid of some cards, check out our article on how to identify the best candidates and the steps to do it the right way.
Finally, just in case you’re thinking about opening a bunch of credit card accounts to increase your available credit total or lower your credit utilization percentage, don’t do it. This could also hurt your credit score because another rating factor is the number of accounts you have open.
So now you know the answer to the question, “Does canceling a credit card hurt your credit score?” Yes, it could if you don’t take your credit utilization percentage into account. But if you keep this in mind and proceed slowly, you’ll be fine.