Should You Cancel a Credit Card?

Canceling one of your credit cards seems like it couldn’t be that controversial. However, there are some consequences to doing this that you might want to consider. It could help you make an informed decision on whether or not canceling a credit card makes the most sense for you.

Potential Disadvantages of Canceling a Credit Card

Doing anything to a credit card impacts one of the most important financial assets you possess—your credit score. For example:

• Credit Utilization Rate: How much of your available credit is used is called a credit utilization rate. It’s an important part of your credit score. For example, let’s say you have $10,000 in available credit. It is spread between two cards. Each one is for $5,000. You have used $4,000 worth of the credit so far. That means you have a credit utilization rate of 40%. You decide to close one of the $5,000 limit cards since you have never used it. That leaves you with $5,000 of total credit available. You have still used $4,000 of it. Now the utilization rate is 80%. This will have a negative effect on your credit score.
• Length of Credit History- If you cancel cards older than your average credit history length, this might negatively impact your credit score.

This is important because credit scores are a major factor when obtaining car or home loans. The lower your score, the less likely you will be able to obtain credit.

Potential Advantages of Canceling a Credit Card

There are some advantages to closing a credit card such as it:

• Simplifies your financial life: Minimizing your accounts can not only simplify your finances, it can simplify your life! Maintaining a simpler, more controlled approach to the financial challenges of life can be very attractive.
• Lowers the possibility theft: Having many accounts sitting around open and exposed increases the risk of identity theft. The fewer accounts you have, the less likely you are to become a victim of this fast growing crime.
• Reduces the possibility of over-extending yourself: This may be a large or a minor advantage depending on your personality. If you have more credit than you need, life circumstances might tempt you to use it if it’s readily available. Having less credit to use means you won’t be able to do that.

Credit is a force that you want to control. If this means you have to cancel a credit card, feel free to do it but consider the ramifications on your credit score if you do.