Canceling a credit card can hurt your credit if you carry high amounts of debt or you have a short credit history. The type of card you cancel matters too. Although the negative impact of canceling a credit card varies with each person's credit profile, you should review your current debt, assess the number and type of cards you own and examine your credit history length.
Review Your Debt
Review the amount of debt you owe and compare this with your overall credit limit. Amount of credit used compared with what you owe counts as 30 percent of your credit score. Suppose you have three cards with a $3,000 total credit limit and the total amount you owe is $500. This puts your debt- to-credit- limit ratio at 16 percent, which isn't bad. Close one of those cards with a $1,500 credit line and you wipe away half your total credit limit, boosting that ratio to 33 percent.
Assess Credit Length
Determine your credit history length. This factor makes up about 15 percent of your credit score and takes into account the total number of credit cards you own and how long you have kept them active. Owning multiple credit cards for several years reflects a long credit history, so canceling one card may only drop your score a few points. Conversely, if you are in the process of building your credit history, canceling a card can dramatically reduce your score.
Examine Card Type
Examine credit card type before you cancel it. Canceling a department store card hurts your credit less than canceling a general credit card. Major credit cards are given more weight in credit scoring because they carry higher limits and their credit lines are not tied to a specific merchant. Cancel a major credit card only when it is costing you money and you already own three or four other major credit cards with low amounts of debt.
Tips
Before canceling any credit card, remember to check that there is a zero balance. Your creditor has the right to double your interest rate and demand that you pay any existing balance off within a certain time period. Never cancel more than one card at a time, even if you are transferring balances to another card; the same amount of debt with a lower number of cards will shorten your credit history, lowering your credit score. Also avoid canceling your oldest credit account.
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