- Personal Finance
5 Reasons Why Canceling That Credit Card Might Not Be Such a Good Idea
If you've got multiple credit cards, you'd probably assume that it makes perfect sense to ditch any that you don't use much so that you can no longer rack up debt on them. Many people immediately ditch credit cards once they've successfully paid off a balance so that the temptation to use them is removed. In reality, canceling them is not always the best course of action, despite seeming so sensible on paper. Here are some reasons why you shouldn't be so quick to cancel your credit cards.
1. It affects your credit score
Getting rid of a particular credit card can impact on your credit score in several ways:
Length of credit history: If the credit card in question is one that you've had for a number of years, closing it will reduce the length of credit history. This is one of the elements used to determine your credit score, so it will inevitably alter your credit score. Many money experts recommend that even if you don't use them, you should hang on to older credit cards to stop them bringing your credit score down.
Debt to credit limit ratio: When you close a credit card, you're also closing the available credit limit that is attached to the card, and this will have a knock-on effect on your debt to credit limit ratio. For example, if the combined credit limits on your credit cards is $55,000 and you currently have $15,000 of debt across these cards, your debt to credit limit ratio is just over 27%. If you then decide to close a credit card that has a credit limit of $5,000, you're combined credit limit becomes $50,000 and your debt to credit limit ratio is now 30% of said limits. This is another element that is used to determine your credit score so you may want to think twice about closing cards with a higher credit limit. As a general rule of thumb, look to keep your debt to credit limit ratio below the 75% mark.
How Important Is Your Credit Score?
If your biggest goal is simply to get yourself debt-free as soon as possible, you might be more interested in ridding yourself of all temptation rather than keeping hold of credit cards just to maintain your credit score. If you're not likely to be applying for 'big' credit like a mortgage or an auto loan in the next few years, then you can probably afford for your credit score to take a hit. If these are in your plans though, it's much better to play the numbers game so that your application won't be rejected outright on the basis of your not-so-good credit score.