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Don't Cancel That Credit Card!

Unless your idea of "streamlined" finances is having eight credit cards in your wallet (that's about how many the average card-carrying U.S. citizen hauls around), you've probably considered canceling some of credit cards you don't use often.

Before you dash off "Dear John" letters to your lenders, first make sure you're not doing more harm than good by parting ways.

The truth about canceling credit cards
Do unused lines of credit hurt your credit score -- or help it? Will removing old information about already closed accounts make you look more (or less) attractive to bankers?

Great questions. Let's clear up some common misconceptions:

Closing accounts will not undo anything. Once 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 (late payments, charge-offs, overspending) associated with your accounts. Sorry, you simply can't deny your past. But at least it will fade away and, for most negative entries, 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. Lenders 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 like the lending industry loves customers who have gobs of plastic, but as with most things, 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 while simply closing accounts won't necessarily have an immediate positive effect, over time it could boost your credit score. So let's see if it's time to break up with some of your banks.

Keep the oldies ... As we said above, commitment counts, and lenders see long-held accounts as proof that you are the responsible citizen that we know you are. So, if it's the 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 latter.

... and the goodies. If you get points, miles, cash back, 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 really common. So if the card carries an annual fee, call and ask if it can be waived. If you don't get back what you pay annually to use it, consider cancelling.

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. Those credit cards that have ever-shifting rules and rates require an eagle eye be kept on all those leaflets that come in the mail. If you're not the type to keep your eye on the dealer, this 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. If debt was a problem in the past and may become one in the future, keep open those accounts where you have a decent track record -- meaning no (or few) bloopers (like late payments or overages) -- and a longstanding 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. If you're 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.

In addition to using the nuts and bolts of your credit card program, other factors may play a role in reviewing your lending relationships. Customer service is a biggie for some, and it's usually not an issue until something goes wrong.

The right way to close a credit card account
Simply cutting up the card and calling it quits doesn't count. An unused card is still an active account (until expiration), so while you might not be getting a bill in the mail, the bank still counts you as a customer. If your number gets in the wrong hands, you might not notice until it's too late.

To end your relationship with your lender for real, call the 800 number on your card statement and find your way to a live operator. Specify that you want the account closed -- and this is important -- "at the cardholder's request." It's a minor point, but it looks better on your credit report if the account was terminated by the user and not the lender.

Know when to hold them, when to fold them
It's tempting to do a major spring cleaning and dump all the dusty cards from your wallet at one time. However, cutting off too many lines of credit at once can give the wrong impression on your credit score. Again, 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 in no time.

For more on managing your credit, read about:


Read/Post Comments (7) | Recommend This Article (55)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 16, 2009, at 11:14 AM, vivvie1 wrote:

    all good advice, thanks. But, I need to know what I can do for my 21-year-old son. He is going away to finish his degree in two weeks. He has maxed out 2 credit cards (900 each). I want to keep tabs on his spending by receiving the statements. I was going to either add him to one of my credit cards (my FICO is over 780) or get a new card with my name and his name or get a secured card. Will doing any of those help his credit score and not hurt mine? If you cannot answer this, who would you advise me to call? Thank you.

  • Report this Comment On September 05, 2009, at 1:30 AM, KoreyM wrote:

    Today’s figures stoke concern that the recovery forecast to take hold in the second half of the year wouldn’t prompt a turnaround in the job market until 2010. With the ranks of long- term unemployed nearing 5 million, workers are at risk of losing skills, making it even tougher for them to eventually find work. With people increasingly worried about their job security, giving a tax rebate, while helpful, is not going to entice them to go out and spend. They are more likely to pay off their credit cards and put the rest into a guaranteed bank or hide it under the mattress. Consumer spending will remain depressed and companies will report worse results for the last quarter of 2008 and the first half of 2009. The fourth quarter results commence <a href="http://personalmoneystore.com/Payday-Loans/instant-Payday-Lo... cash</strong></a> next week led by Alcoa, which has announced 15,000 lay-offs. The United States of America (US or USA) has the world’s largest economy.

  • Report this Comment On April 30, 2010, at 11:51 AM, aponi wrote:

    I've killed off all of my gas and department store cards. I end up getting the department store ones because they pester the daylights out of you in the store and depending on the store, you can get discounts. I just decided that it wasn't worth it and closed the accounts down. Somehow 25% off of something I don't need anyway didn't seem like such a good deal anymore.

    Just yesterday I needed some make-up and headed to the friendly mall. Sure enough at the register I got the standard pitch about the store's card. I'm positive the clerks get some sort of incentive when people open those. I wasn't sure how I was going to handle it but oddly enough she backed off when I handed over my debit card and said, "I'm not using credit cards anymore".

    seems simple enough

  • Report this Comment On June 16, 2011, at 1:19 AM, paulsarwa wrote:

    The level of "acceptable credit" is determined using a Debt To Income (DTI) ratio.(http://www.debtfirms.com/debt-to-income-ratio.html) This number is probably as important as your credit score. Lenders use this ratio along with credit score and other important factors to determine interest rates and loan amounts.

    Let's say you plan to get a significant amount of loan in the near future. In addition to show that you are responsible with your credit usage -- paying your bills on time, every time -- remember to check your DTI ratio. If you find it above your lender reference it is important that you take steps to reduce the ratio before you apply for the loan.

  • Report this Comment On January 06, 2012, at 1:57 AM, creditexpert8 wrote:

    I have to agree; don't cancel that credit card :-) By doing so, consumers will actually hurt their credit rating. It's important to pay off, and slightly use a credit card to ensure the highest credits core possible. Canceling a credit card can actually harm a consumers credit score in a negative way. mark @ http://www.consolidate-debts.com

  • Report this Comment On January 22, 2013, at 7:21 PM, herrodpete wrote:

    also worth mentioning, if you do find yourself getting behind, missing payments or filing for BK make sure you get your credit fixed. Get all the negative stuff off your credit. Probably best to hire a credit repair company. but make sure you hire a reputable one. I have heard about Lexington Law being one of the best out there. Business ove 20 years. Don't want to go with a fly by the night firm, its not worth it. 

  • Report this Comment On January 14, 2014, at 9:39 PM, WindyCityMan wrote:

    15% of your credit score is the average age of your open accounts. Closing old accounts shortens your length of history and decreases your credit scores. So keep your old credit cards active and open, use them every 3 months to buy a pack of gum and pay the balances off at the end of the month. You don’t want the credit card company closing your account due to inactivity.

    http://www.creditfirm.net/blogs/7-steps-to-better-credit.htm...

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