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!