With all the controversy surrounding consumers' dependence on credit,
it's only natural to think that you'd be better off with fewer cards
weighing down your wallet.
Not so fast. Many people rush to streamline their wallets, thinking
that fewer cards will make them look better to lenders. Often, the
exact opposite is true: Canceling credit cards can actually hurt your
credit score more than it will help.
Before you dash off "Dear John" letters to your lenders, learn the truth about canceling credit cards.
Four reasons to keep your cards in your wallet
you're like the average card-carrying U.S. citizen, you have about
eight credit cards in your wallet, and probably only a few of them are
regularly in play. It's tempting to do a major spring cleaning and dump
all of the dusty cards from your wallet at once. However, cutting off
too many lines of credit at once can give the wrong impression on your
credit score. But bear in mind ...
Closing accounts will not undo anything
a credit card is in play, there's no denying its existence. It's on
your permanent record -- your credit report -- for at least seven
years. Yes, even if you cancel the card the next day. Same goes for any
red marks associated with your accounts, such as late payments,
charge-offs, and overspending. Sorry. You simply can't deny your past.
But at least it will fade away; most negative entries will fall off
your report in seven years. However, you might not want some entries to disappear.
Why deny the good?
Removing old closed
accounts that have no negative items is a bad idea, because you benefit
from a long credit history, and those accounts speak to that history.
(Good entries can remain on your report forever.) Remember, 15% of your
credit score is determined by how long you've been borrowing.
Closing accounts might hurt your FICO score
take a hard look at the ratio between the balances on your revolving
accounts and your total available credit. If you do have debt, try to
keep it to less than 30% of your available credit. (The ideal
number here is, of course, 0%.) Go ahead and keep those lines of credit
open, but don't be tempted by untouched lines. When you close out open
accounts, those credit lines are no longer factored into your ratio.
Thus, your debt as a percentage of available credit will increase. Ouch.
Why cancel cards at all?
It may sound as
though the lending industry loves customers who have gobs of plastic,
but as with most things in life, it's best not to binge. According to
Fair Isaac, once you acquire more than seven revolving debt accounts,
your FICO credit score begins to suffer a little. And although simply
closing accounts won't necessarily have an immediate positive effect,
over time it could boost your credit score. So let's see whether it's time to break up with some of your banks.
Keep the oldies ...
counts, and lenders see long-held accounts as proof that you're the
responsible citizen we know you are. So, if it's a choice between
parting ways with that dashing new sliver of plastic in your wallet, or
the faded alumni credit card you got when you still had hair, keep the
... and the goodies
If you get points, miles, cash back, or good karma from using a credit card, and -- this is important -- you actually take advantage
of the goodies that come with membership, keep the card in play. It's
good to know, however, that credit cards with rewards programs are
pretty common. So if the card carries an annual fee, call and ask
whether it can be waived. If you don't get back what you pay annually
to use it, consider canceling.
Dump the flighty ones
Just because your
credit boasted a single-digit interest rate when you got it doesn't
mean it will do so indefinitely. Nothing's uglier than paying for a new
transmission at a 23.9% interest rate. When it comes to credit cards
with ever-shifting rules and rates, you have to keep an eagle eye
focused on all of the leaflets you get in the mail. If you're not the
type to keep your eye on the dealer, this type of card may be a lot
more trouble than it's worth to keep in play.
Keep the ones that stood by you in bad times
debt was a problem in the past, and may become one in the future, keep
open the accounts with which you have a decent track record -- meaning
no, or at least few, bloopers, like late payments or overages -- and a
long-standing relationship. If the low-interest offers dry up, your
room for negotiating a better deal is best with a lender that has fond
long-term memories of your time together.
Hold on to your single days
married, don't give up your identity entirely. Simply being an
authorized user on your sweetheart's credit cards won't help you
establish credit or keep your reputation intact. You must keep at least
one line of credit from your single days open and active, and in your
name only. If you don't occasionally use the card, your file will go
dormant and become unscoreable.
Know when to hold 'em, know when to fold 'em
the level of "acceptable credit" depends on your income. Too high, and
you're a risk. Too low, and your banker may wonder why you don't
qualify for more. Still, with responsible credit usage -- paying your
bills on time, every time -- any short-term blip will be history before
you know it.
Copyright 2009 by United Press International.