Thinking About Cancelling Your Credit Cards?

So, you’ve worked really hard to pay off one or two of your credit cards…it’s really tempting to just close that credit card account so you won’t even be tempted to use it again, but should you cancel paid off credit cards, even if you’re not using them?


The decision to close a credit card account, even one that you aren’t using, is not nearly as simple as it may seem.  Not only will closing the account limit the amount of available credit you have in the event that you need it at some future time, but you can also seriously hurt your credit score because closing that account can potentially affect two separate credit score indicators, your credit utilization and your payment history.

Remember, your credit utilization score is the percentage of your total available credit that you are using at any given time.  So, if you’ve got $3,000.00 in total credit, but you’re using $1,000 of it, your credit utilization score is 33 1/3%.  But, if you close one credit card with a $1,000 credit line, then you’re reducing your available credit to $2,000, and if you’re using $1,000 of that amount, your credit utilization score will immediately jump to 50%, and that’s way over the 30% credit utilization score that lenders like to see.

And that’s not the only thing that closing an account that is in good standing can affect.  When you close an account with a long payment history, that you’ve had for a number of years, you’re running the risk of lowering your credit history score, which is based on how many years you have had credit and whether or not you’ve made regular, on time payments.

So, is closing the credit card account really worth the risk?

Although closing a credit card account can negatively affect your credit score, there are times when it makes sense to close the account… especially if the credit card has a high annual or even a monthly fee and/or you can replace the available credit with another credit card with no annual fees, or maybe even a lower interest rate.

Either way you choose to go, think before you cancel that credit card!

What is My Credit Utilization Score?

So, you’ve been paying attention to your credit scores, and you understand the payment history, age of accounts, and other stuff, but do you know what the Credit Utilization score on your credit report means?  Credit utilization is exactly what it sounds like, it’s how much of your available credit that you are currently using.  You can calculate your credit utilization by taking the total amount of credit that you have available on all of your credit cards and dividing it by the balance owed on all of the cards.


For example, let’s say you have a credit card with a $1,000.00 credit limit, but you’re carrying a balance of $600.00 on the card – that means you’re using 60% of the total available credit that you have with that credit card provider, which may not seem too bad to you, but to a potential lender, it means you’re using the majority of your available credit.  If your credit cards are maxed out, you’re using 100% of your available credit, also not a good thing.

Typically, you want to use 30% or less of your total available credit at any given time, and if at all possible, you want to break that down even further and use only 30% of your total available credit on any individual account, as well.  (Unbelievably, some creditors and credit bureaus also look at individual credit cards now, too!)  Using more than 30% of your available credit actually brings your credit score down a few points to a lot of points because your credit utilization score accounts for 30% of your total credit score.

So what can you do to better your credit utilization score?  Ideally, you should pay off all of your credit cards every month, but in the event that you can’t, you might want to consider getting another credit card to increase your available credit – that credit card can be a balance transfer card, a regular credit card, or even a catalog shopping card (like a Fingerhut Credit Account), just as long as you don’t go overboard when applying for new credit cards, and just as long as you don’t run up a new bill on your new credit card!

Note:  Your Credit Utilization Score only includes your revolving credit accounts.  Any mortgage or automobile loans are not taken into consideration.

What’s in Your Credit Score

Ever wonder what exactly is a credit score?  What even makes up your credit score?  And, even more importantly, exactly what impacts your score has on your finances and why?

Basically, a credit score is nothing more than a simple three digit number that credit bureaus use to determine your credit worthiness, but depending on what your actual score is, it can have a huge impact on your finances, including not just the amount of money you can conceivably borrow and the interest rates you’ll have to pay for credit cards, car loans, and even mortgage loans, but also on the type of job you may or may not get, and even the rates you’ll be charged for car insurance, homeowner’s insurance, and so much more.

That’s why it’s so important to not just know your credit score, but to improve your score if it is not as high as you need it to be.

What makes up your credit score?

Although there are lots of places that provide consumer credit scores, most of them are not actually used by lenders to assess your credit worthiness.  Financial institutions actually rely on two major credit scores, your FICO score and your VantageScore, when deciding if you’re eligible for a loan.  VantageScore and FICO credit scores range from 300 to 850. The higher the number, the better your credit rating.

Here are the ranges for both:

FICO score

  • 800 to 850: Exceptional
  • 740 to 799: Very good
  • 670 to 739: Good
  • 580 to 669: Fair
  • 300 to 579: Very poor

VantageScore

  • 750 to 850: Excellent
  • 700 to 749: Good
  • 650 to 699: Fair
  • 550 to 649: Poor
  • 300 to 549: Very poor

Your credit scores are actually based on elements of your credit history, and once again, the two are different:

FICO score

  • Payment history: 35 percent
  • Amounts owed: 30 percent
  • Length of credit history: 15 percent
  • New credit: 10 percent
  • Credit mix: 10 percent

VantageScore

  • Amount of recent credit: 30 percent
  • Payment history: 28 percent
  • Use of your current credit: 23 percent
  • Size of account balances: 9 percent
  • Depth of credit: 9 percent
  • Amount of available credit: 1 percent

How important is a good credit score?

Since your credit score affects so many aspects of your life, it only makes good sense to monitor your credit report and strive to keep your credit score as high as possible.  The higher your score, the easier it is to qualify for a mortgage, buy a car, or get any kind of credit (and the better the interest rate you’ll ultimately pay).

It also may make it easier to get a job, as some employers check your credit, and even some regulatory agencies refuse to license professionals with a poor credit score, so the penalty for poor credit can affect more than just your financial life.

What if you need to improve your score?

The way in which you use loans and pay debts has a significant impact on your credit score. You have plenty of opportunities to improve your score, but you should know, it takes time to improve your credit score, so plan ahead and start working on your credit history now.

Here are a few simple things that you can do right now:

  1. Pay your bills on time, every time.  Even one late payment can have a significant effect on your credit score.
  2. Pay down the balance on your credit cards and keep them at or below 30% of the total available credit on each card.
  3. Pay off the cards that have small balances as soon as you can, and then, if you use your cards regularly, try to use only one card.  Just remember to keep the balance below the 30% threshold!
  4. Sign up for one of the many free credit score providers, like Credit Sesame, and continuously monitor your score.  You’d be amazed at how raising your score by just a few points will make you feel!