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Should You Cancel Your Credit Card?

Posted by in Credit Cards
18
Sep 2017

Pros and Cons of Cancelling Unused Cards

Reducing the number of credit cards you have seems like a smart financial move, though it is not necessarily true. There are three possible outcomes if you choose to cancel your credit cards:

  1. Your credit-card utilisation ratio will increase
    Your utilisation ratio refers to the ratio of the cumulative balance on all your credit cards to the cumulative credit limit available to you on those cards. If you cancel one of the cards, the cumulative credit limit reduces while the balance remains the same, causing the ratio to increase.

    For instance, if you have three credit cards with a $500 limit each, it means you have a total limit of $1,500. If two of your cards have a balance of $250 each, the ratio when you have 3 cards (2 used and 1 unused) is 500/1500 (33.3 percent). But if you close one of your cards, the limit reduces to $1,000, and the new ratio becomes 500/100 (50 percent).

    Increasing your utilisation ratio signifies increasing debt, though this may not necessarily be true. However, it affects your credit score adversely.

  2. Decrease the average age of account
    The number of different credit cards you have affects about 15 percent of your credit score. Cancelling one of your accounts will adversely affect your rating over time since it will cease to appear in your credit history eventually.
  3. Fewer accounts
    The number of open accounts in your name contributes to your credit score, and closing one of them automatically lowers this number.

If you have a large number of credit cards that are causing you to get deeper into debt, it might actually be a good idea to close some of them. Any adverse effects on your score won’t be immediately noticeable. In fact, it will take 10 years for the effect (of reducing your number of accounts) to register on your credit score since old accounts continue to reflect on your credit history for 10 years.

When should you cancel your credit card?

Considering that cancelling a credit card almost always results in a negative effect on your score, it may seem like a good idea to just keep them for when you need emergency funds. However, if you are paying very high fees on unused cards, or if you are having trouble managing a debt problem, then you should consider cancelling some of your credit cards because they have become a liability.

If you are struggling with debt, you probably don’t have good credit anyway, so you can go ahead and cancel some credit cards. But before that, you should consider seeking consumer credit counselling to help you get out of debt in the long-term.

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