Does Canceling a Brand New Credit Card Hurt Your Credit?

Canceling any credit card can have a negative impact on your credit score, indicates Dayana Yochim of The Motley Fool. However, canceling a newer card with a low credit limit may have less effect than canceling a card with significant usage history and a higher available credit limit.

Dilemma

It may seem unreasonable for someone to get a new credit card and immediately want to cancel it. However, credit card providers sometimes charge annual fees or other maintenance fees, especially for less active card holders. Not realizing this upon application and acceptance of the card, the card holder decides to cancel the card once the fees are discovered. Other times, card holders get a few new cards and decide they do not need them all. The trade off for canceling the card is a potential knock against credit scores.

Credit Score Basics

A number of factors are used to compute your individual credit score, which serves as a metric for lenders to determine your creditworthiness. Credit history, length of credit history, amounts used, types of credit and new credit are five main categories in the FICO credit scoring model designed by Fair Isaac Corp., according to MyFICO, the company's consumer education website. The FICO model provides the foundation for scores generated by Equifax, Experian and TransUnion, the three major reporting bureaus.

Cancellation Implications

When you apply for new credit, the lender typically submits a credit score inquiry to determine whether to issue credit and at what terms. This inquiry typically takes a few points off your credit score based on the new credit section. Once you receive the card, the amounts of credit used section, which accounts for 30 percent of your score, becomes important. Your available credit limit on the new card improves your debt utilization ratio, which compares your credit in use to your available credit. Canceling the card removes that available credit, so you are using a higher proportion of available credit simply because you now have less credit available to you.

Debt Utilization Effects

Low debt utilization is one of the most important factors in your credit score. Assume you get a new card with a $5,000 credit limit. The impact to your credit score with this card are less than with a more established card because of your minimal or zero usage. Eventually, your score improves because your debt utilization ratio falls due to the added credit available to you, assuming you don't charge a lot on the new card. Thus, canceling a new card does hinder your credit score, but not necessarily as much as canceling a card with longer history.

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Adverse Credit Ratings

Many people don't take a class on personal finance in high school or college. So when they enter adulthood and acquire their first credit account, they likely make a few credit mistakes that result in an adverse credit rating. Even if you have a low credit score due to bad credit habits you can get rid of an adverse rating and increase your personal score.

Causes of an Adverse Rating

A pattern of unwise credit decisions can bring down your personal credit rating. Using credit wisely involves paying your credit card accounts and installment loans on time. Consistency is the key and several months of late or skipped payments result in additional fees and an adverse credit rating. Carrying a large amount of debt also damages your personal score as does ignoring creditor phone calls and having a delinquent account sent to collections. Additionally, filing bankruptcy, losing your home to foreclosure and a car repossession can severely lower your credit rating.

Effects of Bad Credit

Adverse credit can have a snowball effect and ruin your chances of acquiring new credit accounts. For starters, your existing creditors may periodically check your credit history and if they note a poor credit rating they may choose to increase your interest rate on present accounts or lower your limit on your credit card. If applying for new credit such as a car loan, lenders may deny your credit application or charge a much higher rate due to adverse credit. Bad credit can also affect your employment options because some employers review the credit history of applicants and may pass on a candidate with poor credit.

Paying off Debt

The amount of debt you owe affects 30 percent of your credit score. Therefore, paying down debts (especially credit card debt) can reverse an adverse credit rating. Getting rid of debt is no easy task and it can take months or longer to put a serious dent in your balances. But paying more on the debt each month and avoiding new charges on your credit card helps reduce the debt more quickly.

Paying on Time

Better payment habits can also reverse adverse credit. Creditors send statements weeks before bills are due, which gives you ample time to send the payment. Opening statements early, recording due dates and budgeting your money allows you to meet this expense on or before the due date. A pattern of timely payments will increase your score slowly each month and get rid of a low credit rating.

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Can Credit Repair Get Rid of a Foreclosure?

Credit repair companies often prey on customers by making outlandish promises the consumers wants to believe, such as eliminating the record of a foreclosure. The credit repair company might be able to get rid of a foreclosure, but not because of any special knowledge or tactics. A better resolution is to build your credit history back up yourself.

Identification

Nobody can get rid of a foreclosure if it actually happened to you. Any company that guarantees the removal of a foreclosure is a fraud. The tactic it probably suggests is an illegal one known as "file segregation" -- using a fake Social Security number or a Social Security number from a deceased person with good credit. Moreover, the illegal tactics suggested by credit repair companies rarely work. Credit bureaus and banks track customers by address in addition to a Social Security number.

Considerations

The only legitimate way a credit repair clinic can remove a foreclosure occurs when the credit bureaus falsely report one on your record. However, the Fair Credit Reporting Act gives you the right to remove mistakes on your record for free. The credit repair clinic likely charges hundreds of dollars just to send a dispute letter. Unless you do not feel you can handle the dispute on your own, you save money doing it yourself.

Time Frame

A foreclosure sticks to your credit report for seven years. It will negatively affect your credit scores until the seven years are up, but you have plenty of time to rebuild your credit history before that happens. You might still have "OK" credit as long as foreclosure is your only negative, which puts you in an excellent position to rebuild your score in a year or two.

Warning

In the event that you choose a credit repair company to help remove an erroneous foreclosure, review the Better Business Bureau for complaints about the company. Also, do not go with any company that charges up-front fees, which are illegal and the sign of a credit repair scam.

Rebuilding Credit After Foreclosure

Rebuilding credit after a foreclosure works much the same way as with any major financial incident. Do everything possible to save money to pay outstanding debts and at least make minimum payments on time. You will probably not qualify for another mortgage immediately, so learn to live in a more humble dwelling. Also, continue to use credit. You can start with a secured credit card -- a revolving account backed by a savings account deposit -- and apply for an unsecured card after you pay on time for several months.

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Solutions for Bad Credit

Bad credit can prohibit you from obtaining bank loans, credit cards and even a job. It's never too late to start rebuilding your credit. Taking steps to fix your credit now can help you achieve your financial goals in the future.

Check Your Credit Report for Accuracy

Begin fixing your credit by checking your credit report for accuracy. Visit the Annual Credit Report website (see Resources) to obtain your credit report for free from the three major credit bureaus (Equifax, Experian and TransUnion). If you notice any inaccurate information listed in your credit report, you can dispute the entries with the credit bureau. Record all past-due and collections accounts listed, as well as contact information for each creditor. Contact each creditor to work out payment arrangements for your debt. Get written confirmation from each creditor stating that they will remove negative entries on your credit report upon payment. As these entries are slowly updated with positive status (or removed altogether) you will notice your credit score increase steadily.

Manage Your Money

If lack of money is prohibiting you from paying down your debts, build a budget for your expenses while saving money to pay off accounts. Monitor your monthly spending habits to see exactly where your money goes and find ways of decreasing, or eliminating, unneeded spending. Set a monetary goal of savings every month to use to pay down past debts that are listed on your credit report. Paying down collections accounts will help you rebuild your credit over time.

Consolidate Debt

If possible, consolidate your debt. If you can secure one loan to cover the balance of several debts, while maintaining a low interest rate, you could save money over time. An advantage of debt consolidation is that you only have one payment to pay every month, making it less likely that you will forget a payment on one of your bills. Be wary of debt consolidation companies that make you pay money up front promising guarantees of quick elimination of debt and high credit scores fast. Debt elimination and good credit history don't happen over night, and anything that sounds too good to be true probably is.

File for Bankruptcy

Bankruptcy should only be used as a last resort when trying to restore credit and get out of debt. Bankruptcy will stay on your credit report for up to 10 years, making it nearly impossible to obtain credit cards, bank loans or other lines of credit during that time. While bankruptcy can offer people a discharge of current debt, it is always best to try to fix your current credit situation before considering this option.

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How Does a Civil Judgment Affect My Credit?

A court awards a civil judgment to the plaintiff in a debt collection lawsuit if the plaintiff sufficiently proves its case or if the defendant does not file a response to the lawsuit and does not appear in court. Because the credit bureaus regularly peruse court records, a civil judgment against you will appear on your credit report. The judgment serves as a record of unpaid debt and will lower your credit score.

Judgment Impact

Although all civil judgments are derogatory, the degree to which a judgment will damage your credit rating depends entirely upon the other information the credit bureaus have on file for you. In general, a judgment hurts you the worst if your credit report contains numerous other derogatory entries, such as credit card charge-offs and collection accounts.

Reporting Period

A judgment only impacts your credit score for the amount of time it remains a part of your credit profile. Once the credit bureaus remove the judgment from your credit report, it will no longer factor into your credit score. According to the Fair Credit Reporting Act, the length of time the judgment can remain on your report depends upon your state's judgment enforcement period. If your state grants the creditor less than seven years to collect the judgment, it will remain on your credit report for seven years. If state laws grant your creditor more than seven years to collect, however, the judgment will remain within your credit history for the duration of the enforcement period.

Consumer Misconceptions

While paying off your judgment is admirable, it does little to improve the damage having a judgment on file does to your credit rating. Lenders who pull your report will consider the fact that you met your obligations a positive factor, but the act of paying off the debt does not directly influence your credit scores. The judgment will continue to appear on your credit report until the reporting period expires--whether you pay it or not.

One exception to this rule exists: In states that only record unpaid judgments, paying off a judgment before the court enters it into the public record prevents the court from officially recording the ruling. In turn, this prevents the judgment from ever appearing on your credit report.

Removing a Judgment

You have the right to contest a judgment that you believe was filed against you in error by filing a motion with the court that awarded the judgment requesting that it vacate the ruling. The court will then schedule a second hearing during which you must present your case. You can also contest a judgment's appearance on your credit report with the credit bureaus if you believe that judgment belongs to someone else and appears on your credit profile in error. The credit bureaus are required by law to investigate disputes and, if the court cannot verify the judgment as yours, the credit bureaus must remove it from your credit file.

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How to Monitor My FICO Score

Monitoring your own credit scores ensures that you are accurately informed of your eligibility for new credit, loans and other goods and services that depend on you carrying a positive credit rating. Not all credit scores are the same. Because most lenders use the FICO score, developed by the Fair Isaac Corporation, to judge credit applications, it's important that you monitor your actual FICO score rather than an "educational" credit score such as that provided by the credit bureaus. You can monitor your FICO score either manually or through the Fair Isaac Corporation's credit monitoring service.

Instructions

Manual Review

1

Visit the Fair Isaac Corporation's website at myFICO.com, and select the option to purchase your FICO score.

2

Check the box for the appropriate credit bureau. Because your credit reports differ, your FICO scores do as well. You can only purchase your FICO scores from TransUnion and Equifax. Experian does not permit the Fair Isaac Corporation to use its reporting data when providing FICO scores to consumers.

3

Create a profile on the website by providing the Fair Isaac Corporation with your personal information, such as your name, address, date of birth and Social Security number. You must also select a username and password. Doing so allows you to log in quickly on following visits.

4

Enter your credit card information. The Fair Isaac Corporation will charge your credit card a fee for each FICO score you purchase.

5

Answer several random questions about information currently on your credit report. This helps the Fair Isaac Corporation verify your identity.

6

Print your credit scores when they appear on your screen. Put the scores and accompanying information in a safe place.

7

Repeat the process periodically when you want to monitor changes to your FICO scores. It's up to you whether you want to monitor your FICO scores on a monthly or semi-annual basis.

Score Watch Monitoring

8

Visit the Fair Isaac Corporation's website at myFICO.com. Select the option "FICO Scores and Credit Reports" located at the top of the screen. This takes you to the Fair Isaac Corporation's Score Watch credit monitoring program.

9

Select the payment option that best fits your budget. You can opt to pay for Score Watch monthly or twice each year.

10

Create a profile with the myFICO website to allow you to log in to the service more quickly. This process is the same whether you opt to subscribe to Score Watch or manually pull your FICO scores throughout the year. You must include a valid email address in your profile so that myFICO can send you updates whenever your score changes.

11

Enter your credit card information when prompted. Verify your identity by correctly answering the series of questions regarding information already present on your credit report.

12

Log in to the service using the username and password you selected to check your FICO scores whenever you wish.

13

Check your email regularly for email updates from the Fair Isaac Corporation noting changes to your FICO scores.

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Poor and Bad Credit History

Everyone who has ever taken out a formal loan or used various other forms of credit likely has a credit report on file with the credit bureaus. This credit report includes information about the person's credit history that is entered into a formula developed by credit reporting bureaus and used to formulate the person's credit score. This score stands as a measure of the person's credit history.

Credit Score

All credit scores fall between 300 and 850. The higher the score, the better the person's credit history, while the lower score, the worse it is. According to the financial website Bankrate.com, a "good" score, meaning one that will qualify a person for the lowest mortgage rates on a home, is considered 720 and above. The definition of a "bad" score is relative, but the lower the score, the higher the rates of interest a person can expect to pay on a loan.

"Bad" Credit

A person develops a good credit score by taking out loans and paying them back on time. This demonstrates that, when lent money, a person will be likely to repay the lender. However, if a person does not pay these loans back on time -- meaning he pays them late, not at all or only for part of what he owes -- this will be recorded on his credit report and lead to a lower score.

"Poor" Credit

Sometimes a person will have no credit at all. This is not quite the same as having a bad credit history, as the person is more of an unknown quantity than a person who has demonstrated financial irresponsibility. This person could be considered to have poor or impoverished credit, as there is a lack of sufficient information about the person's lending history to give him a credit score.

Building Credit

People with bad and poor credit can rebuild their credit the same way -- by taking out new loans and paying them off on time. Sometimes it can be difficult for a person with this kind of credit history to qualify for loans. To start, a person may wish to take out a secured credit card -- a card that is secured by collateral. If the person uses this card responsibility, his credit rating will continue to rise until he qualifies for a traditional credit card.

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