Are you contemplating closing out a few or all of your credit cards? You may have heard that doing so is detrimental to your credit score. While there is some truth to this statement, the effect depends on a number of distinct factors.
How Your Score Is Affected
Are your outstanding balances close to the credit limit? If so, canceling a credit card, particularly one with a substantial amount of available credit, could ding your score.
Says myFICO: "When a high percentage of a person's available credit has already been used, this can indicate that a person is overextended, and is more likely to make some payments late or not at all." In other words, those individuals with little to no available credit may be perceived as risky to lenders.
To illustrate this point, take a look at the following scenarios:
|Action||Accounts (with outstanding balances)||Credit Limits||Utilization|
|Scenario 1||none|| |
Card 1- $100
Card 2- $0
Card 3- $3800
|Scenario 2||Close Card 2|| |
Card 1- $100
Card 3- $3800
|Scenario 3||Close Cards 1 and 2||Card 3- $3800||$5000||76%|
Length of Credit History
According to myFICO, "in general, a longer credit history will increase your FICO score." This is also possible if you are new to the credit world. Therefore, canceling a credit card that you have held for an extended period of time can also tank your credit score, especially if the remaining accounts are fairly new.
Types of Credit Used
When analyzing you application for credit, some lenders may consider your experience with varying types of debt, whether it be installment, revolving or both. Closing your credit card accounts may raise the eyebrows of prospective lenders.
Should You Cancel Your Credit Cards?
The choice is yours, but leaving those accounts with a ton of available credit open doesn't seem to hurt. In fact, Barry Paperno of Credit.com urges consumers not to worry about a substantial amount of revolving credit availability because it can actually lower your credit utilization, which boosts your score.
Cards With Outstanding Balances
If you are considering closing cards with outstanding balances in an effort to make all the negative information go away, this won't work. Canceling a card prohibits you from incurring additional charges, but does not make the account disappear. Therefore, you should continue to make timely payments since it will continue to show up on your credit report.
If you do otherwise, the account will eventually go to collections, which will do a substantial amount of damage to your credit score and appear for up to seven years.