For various reasons the idea of canceling a credit card may seem like a good idea, but this is not always true. In the article by Gregory Taggert, “Cancel a Card, Hurt Your Credit,” it says canceling a credit card will probably lower your credit score.
Credit agencies use five percentage based factors to determine your credit score. You may want to study the factors because canceling a credit card can negatively affect them.
Making timely payments
Thirty five percent of your credit score is based on making timely payments. If your payments have not been on time it may be best to keep the card, until you’ve established a positive payment record. It won’t help your score to cancel the card now because your payment history remains on your record.
Using credit limit
Credit agencies want you to manage your credit limit. Thirty percent of your credit score is based on you using no more that 30 percent to 35 percent of your total credit limit. If you cancel a card it increases your debt to limit percentage, which may lower your score.
Fifteen percent of you credit score is determined by how long you’ve used a credit card, and paid on time. Always cancel a newer card first, if possible.
Type of credit
Ten percent of your credit score is based on diversity. Ideally, credit agencies like to see your credit record include car loans, mortgages, store cards, and maybe a Visa or Master Charge. If you cancel a card make sure it’s an extra in one of the above categories.
Ten percent of your credit score is based on establishing new credit. Before you open new credit attempt to have your credit portfolio in line with the other credit indicators, which shows proper credit management.
Instead of canceling a credit card consider cutting it up and keeping your account open. In this way you can continue to make timely payments improving your credit rating, and not be tempted to use the card.
In the next few months legislation the government has passed goes into effect. The new legislation will limit penalty fees and interest rate increases credit card companies can impose, so, you may need to change your attitude about credit.
Credit card companies are going to be lowering limits, and raising minimum fees for customers they determine to be at risk of defaulting. This will limit credit card usage for millions of people.
Most people will now be forced into managing their credit. Now might be the time to study your credit situation, and plan to become more cash oriented.
Gregory Taggort: “Cancel Your Card, Hurt Your Credit,” Bankrate.com