ATLANTA - We’re told not to rely on credit cards to get by, but if you cancel them you can hurt your credit score. You want to strategize before making this move.
A few things go into your credit score, but these are the two we are talking about: length of credit and credit utilization.
- Length of Credit History - 15 percent
- Credit Utilization - 30 percent
- Payment History - 35 percent
- Credit Mix - 10 percent
- New Credit - 10 percent
For the length of credit history, the longer your credit history the better. Credit utilization is how much of your available credit that you are using.
Let’s say you have a $1,000 limit on a credit card and it has a $100 balance, that’s far better than using $800 of that $1,000.
Sara Rathner of NerdWallet, a finance site, help us to understand how this matters when canceling cards.
"In general, we recommend not charging more than 30 percent of your total available credit limit every month. Ideally, less than 10 percent. So, if you, for example, close a credit card, your credit limit goes down. But if your spending remains unchanged, it makes it that much easier to spend more than the recommended limit on your cards."
Nearly half of Americans, 48 percent, think it’s a good thing to close an old credit card you no longer use. You can, but you should strategize before doing it.
Try to get your balances down before canceling the card to offset that balance-to-credit ratio. Closing a card will cause a credit score blip, so don’t do it when you’re trying to secure a loan. Do it far before or after so that you can recover. And if the card doesn’t charge an annual fee and it costs you nothing to keep it open, it doesn’t hurt to keep it.
Don’t cancel your oldest card, the one with the longest credit history. If you are going to cancel, make it a newer one.
Lastly, if you have a credit card you don't use, the issuer may see it as dormant and cancel it for you affecting your credit score. Use it from time to time to keep it viable.