With all the controversy surrounding consumers' dependence on credit, it's only natural to think that you'd be better off with fewer cards weighing down your wallet.
Not so fast. Many people rush to streamline their wallets, thinking that fewer cards will make them look better to lenders. Often, the exact opposite is true: Canceling credit cards can actually hurt your credit score more than it will help.
Before you dash off "Dear John" letters to your lenders, learn the truth about canceling credit cards.
Four reasons to keep your cards in your wallet
If you're like the average card-carrying U.S. citizen, you have about eight credit cards in your wallet, and probably only a few of them are regularly in play. It's tempting to do a major spring cleaning and dump all of the dusty cards from your wallet at once. However, cutting off too many lines of credit at once can give the wrong impression on your credit score. But bear in mind ...
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 associated with your accounts, such as late payments, charge-offs, and overspending. Sorry. You simply can't deny your past. But at least it will fade away; most negative entries will 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 as though the lending industry loves customers who have gobs of plastic, but as with most things in life, 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 although simply closing accounts won't necessarily have an immediate positive effect, over time it could boost your credit score. So let's see whether it's time to break up with some of your banks.
Keep the oldies ...
Remember, commitment counts, and lenders see long-held accounts as proof that you're the responsible citizen we know you are. So, if it's a 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, or 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 pretty common. So if the card carries an annual fee, call and ask whether it can be waived. If you don't get back what you pay annually to use it, consider canceling.
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. When it comes to credit cards with ever-shifting rules and rates, you have to keep an eagle eye focused on all of the leaflets you get in the mail. If you're not the type to keep your eye on the dealer, this type of 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 the accounts with which you have a decent track record -- meaning no, or at least few, bloopers, like late payments or overages -- and a long-standing 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.
Know when to hold 'em, know when to fold 'em
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 before you know it.
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Dayana Yochim has remained faithful to her first credit card company for nearly two decades, although she admits to playing the field a few times when another bank has caught her eye. The Fool's disclosure policy doesn't cheat on you.