Canceling Your Old Credit Card Can Hurt Your Credit!

It may seem like a great idea to cancel your old credit cards especially when you aren’t using them anymore.  But, you actually will be hurting your credit score if you do so, in most cases.  There are several aspects that are taken into effect here.  Most importantly, before you do anything to change your account standing is to know how it will affect you today as well as into the future.

Your Credit Report:  Understanding How It Works

One of the most confusing things for people to realize is just how their credit report works.  Shouldn’t you clean up your old, unused credit cards?  Why not get rid of that small line of credit you don’t use anymore?  While it may make sense from that outlook, it doesn’t make sense to the credit reporting agency.

You see, these agencies will go through the report and give points for many things and deduct points for others.  Obviously, not paying your bill on time or over extending your credit limit isn’t going to help you but will hurt you.  Paying your bills on time and maintaining low balances earns you benefits.  But, then there is the gray area.  There are some things that may not be as obvious that you should take note of. 

Closing Old Accounts

If you are closing your old accounts just because they are old and unused, you’ve fallen across the good points line.  That is, this can harm you.  One thing that these credit card accounts are providing for you right now is the ability to say you’ve had credit for that long.  If one of those accounts dates back five, six or twenty years, that establishes your credit history for that long of a time.  If you closed it, and your next credit line only goes back three years, you’ve really shortened the amount of time that you’ve held credit, making it look like you are new to the game.

Closing old accounts will cut down on your experience in the world of credit.  This can lower your credit score but lowering the time that you’ve spent establishing your credit score.  Don’t do it.

Getting Rid Of Accounts Unused

Even if the credit line is not all that old, you should reconsider just whether or not you should be closing it.  See, there is more to establishing credit then just opening an account.  Creditors want to see just how well you are managing the credit you have. 

For example, if you have three credit accounts, one with a $4000 credit line, one with a $2000 credit line and the final one with only a $500 credit line, you have amassed a credit amount of $6500. Perhaps you owe $2500 on the two largest accounts and are considering closing the third to keep yourself from using it.  If you do, this is what happens. 

With your $6500 in available credit, you have a credit to debt percentage of about 38%.  But, if you take out that $500, your credit to debt percentage has increased to 42% of your total available credit.  While these are simple numbers, if you multiply them out to fit your situation you can see what happens.  By removing available, unused credit from your credit report, you are increasing the percentage of debt that you have in comparison to the amount of credit you have available to you. 

By closing off accounts that have no balance on them, you lower the amount of credit you have and therefore raise your ratio.  That looks bad on a credit report and just those 4% can significantly hinder your credit score to future lenders.

So, what do you do if you do want to close off some of the accounts you may have and don’t use?  If you are trying to protect yourself from using that credit, you should consider putting that card away.  To avoid closing older accounts, you can ask the lender to lower the available line.  Whatever you do, you want to keep as much credit as you can open, especially when it is good credit.