To cancel or not: Credit cards?

Question

Is it better for your credit rating to keep credit cards and not use them (they are paid off) or is it better just to cancel them?

Answer 1

As long as you are not paying a yearly fee then keep your cards.  Lenghth of time that you have an account is part of your credit rating as does the amount of available credit that you have.

Here is advice from a credit expert:

"If your goal is to improve your credit score, closing accounts is not a good tactic," says Craig Watts, consumer affairs manager for Fair, Isaac and Co. based in San Rafael, Calif. "Paying down credit cards is terrific. Closing them is not going to help."

Canceling a large amount of unused credit could actually hurt your credit score.

Credit-scoring models look at a number of factors when calculating your score, including the result of the following formula: The total amount of debt on credit cards and revolving accounts divided by the total amount of debt available on those accounts.

This formula results in a fraction less than one. The lower the fraction the better. A score of one would mean your outstanding debt equals your available credit and you've maxed out your cards.

Let's look at an example. Let's say you've got $5,000 of debt and $15,000 in credit lines. By dividing 5,000 by 15,000 you get one-third. You're using one-third of the credit available to you.

Now let's say you cancel an unused credit card with a $5,000 limit. You've still got $5,000 of debt but only $10,000 in credit lines. By dividing 5,000 by 10,000 you get one-half. You're now using one-half of the credit available to you.

The closer to one this fraction gets, the more it hurts your credit score.

"When you cancel unused credit cards without paying down your credit debt you change that ratio so it appears as though you're closer to being overextended," Watts says.

The best advice for a home or auto shopper is to hang on to credit lines until after you've landed your loan.

"Wait until you've been approved for the loan and have the money in hand and then start closing accounts," Watts says.

If your credit card balance is zero, go ahead and close as many unused accounts as you want. As long as your credit cards are balance-free, it won't hurt your credit score a bit. So call those card issuers and cut away.

If you're in credit trouble or if you had credit problems in the past and you know an open credit line is just going to tempt you to spend -- go ahead and close the account.

Yes, it may ding your credit score a bit. But if it will keep you from acquiring more debt, it's best to do it. You can worry about building up your credit score after you're back on your feet financially.

Answer 2

Depends on you

Answer 3

i don't think it matters cos your credit report generally only reports bad things (as well as when you apply for new cards). the report doesn't say anything when you close an account.

Answer 4

your credit report also has the amount of available credit you have, even if you have no balances. it can count against you if you are applying for a loan like a mortgage.

the reason for this is that you could get yourself into payment trouble if you went out and charged a bunch of stuff up to your limits. all of a sudden you have larger payments and might default on your mortgage.

Answer 5

Better to keep your oldest accounts open.  The only thing worse than bruised credit is new credit.

Answer 6

If you are planning on getting a loan anytime soon, keep the cards open until you get the loan.  However, if you are not looking to borrow money, go ahead and close them.