Card Cancellations And Your Credit Score

(There are many different misconceptions and beliefs on what things will hurt your credit score and what things will improve it. )

Since so many factors are all looked at to determine a credit score, it can be very difficult to determine what things are beneficial and which are detrimental.

Everyone’s credit history and situation are different, so what may have helped someone’s score out could actually end up hurting your score.

One of the things that are most controversial on the debate of hurting versus helping your credit is whether or not canceling a card will hurt your credit score. A November 14, 2006 article by Gregory Taggart of Bankrate.com, “Cancel a card, hurt your credit,” looks at how more often that not, canceling a card will have a negative affect on your credit score.

“Everyone knows that your credit score is important to your financial life, affecting the rates you get for mortgages, credit cards and insurance. Improving your score may save you thousands of dollars in interest. So would it help your score if you got rid of a credit card?” 

““Pay your bills on time and keep your credit expenditures under control, and you won't have to worry about your credit rating,’ says Craig Watts, spokesman for Fair Isaac Corp., which calculates the FICO score for consumers. ‘If you're having trouble doing that, sometimes canceling a credit card in an effort to get your credit behavior under control is more important than your credit score.’”

But this is just part of the answer, since your credit score is determined by five different factors, according to the Fair Isaac Corp. Payment history is 35 percent, amounts owed is 30 percent, length of credit history is 15 percent, new credit is 10 percent and types of credit used determines the last 10 percent.

The reason why cancelling a credit card could hurt your score is it will most likely upset the credit utilization ratio.

“For example, assume you have three cards with total available credit of $20,000. Assume further that your outstanding balances total no more than $6,000 of that available credit at any one time. Since creditors like to see a credit-utilization ratio of 30 percent to 35 percent or less, you're in good shape. Now, assume that you cancel a card with a zero balance and a $10,000 credit limit. Suddenly, your utilization ratio jumps to 60 percent, and your credit score drops.”

If you find your spending is out of control and you must cancel the card, there are ways to minimize the effects on your score. First, only try and cancel new accounts, since cancelling old accounts you have had for a while will only deplete your length of credit history, thus further decreasing your score.

Also, you must be aware of how many credit cards you have opened. “Your credit report may also alert you to another reason to cancel a credit card: You can have too many credit cards. Though there is no magic number -- again, because each person's credit situation is so different -- your credit report does give so-called reason codes for your credit score.”

Having too many credit cards is one of the few reasons where cancelling a card could actually be beneficial to your score. But for the most part, cancelling a card for no reason will just hurt you in the long run.

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