Is Canceling Credit Cards Bad for Your Credit?

After paying off a credit card debt, you might think the next best move is to close the account to avoid future spending temptations. Think again. Though it may seem like a logical thing to do, canceling a credit card account can actually have a negative effect on your credit score.

What Goes Into Score

Your credit score is based on many aspects of your history of credit management. Whether you pay on time and how much debt you have carry the most weight in determining your score. Other considerations include how much credit you have available to you, how long you have had that credit and how often you take out new credit. Canceling credit cards can have a negative effect on your debt ratio and your credit history.

Debt Ratio

How much debt you carry relative to how much credit you have available can affect your credit score. For example, someone with $1,000 in debt and $30,000 in available credit is a better credit risk than someone with $3,000 in debt and only $10,000 in available credit. When you close a credit card account, it reduces this ratio. Say you have $5,000 in total credit card debt and two credit cards, each with a $10,000 limit. Your debt-to-available-credit ratio is 25 percent. If you pay off one card that has $2,500 in debt and then close the card, your debt ratio stays at 25 percent. However, if you leave the card open, your debt ratio drops to 12.5 percent.

Credit History

Another way that canceling a credit card affects your credit score is by shortening your credit history. This is especially true if the card you are canceling is one you have had for many years. Also, if the account was one where you constantly paid late, canceling the account will not make the black marks you incurred go away, even if you have paid it off, according to MyFICO.com. If you feel you must cancel a card, Leslie McFadden of Bankrate.com says you should cancel a newer card or one with a low credit limit if possible.

Alternatives

Instead of canceling a credit card, simply put it someplace where you won't be tempted to use it, such as in a safe. Don't forget about it, however. McFadden suggests using the card every few months, charging a couple of items you would buy anyway, such as groceries or gas, and then paying off the bill when it comes. This will prevent your credit card company from charging you an inactivity fee or canceling the card because of lack of use.