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Topics addressed on March 3, 2010:
Deciding whether to cancel credit cards you don’t use
How do you get rid of too many credit cards even if you haven't used them for years? Also, some credit card companies are charging fees. How do we cancel those cards without hurting credit scores?
If you received a credit score and the risk factors indicated you had “too many credit cards,” you can probably close the accounts without hurting your credit score. That risk factor statement means that one of the things most affecting the score is that you have too many credit cards. Therefore, closing some of them should help the score.
Most consumers have the opposite problem of having too few cards with too high balances. Closing accounts typically will hurt their credit scores to some degree because doing so increases the utilization rate.
A high utilization rate, also called the balance-to-limit ratio, indicates credit risk. You can calculate your utilization rate by adding up all of your credit card balances and dividing that number by the total of all of your credit card limits. If you still have plenty of open credit limit after closing the accounts the impact on your scores should be minimal.
To maintain a strong credit history, you always need to have one or more credit card accounts open and use them responsibly. However, if you just have more cards than you need, the decision becomes a little more difficult. Common sense, not your credit score, should be the deciding factor.
Some credit card providers are beginning to charge annual fees because of the current economic environment. That doesn’t mean you should automatically close the account. If the card offers incentives, such as airline miles or cash back, you may choose to keep it open if your rewards are of greater value than the fee. However, if you do not plan to use the card, close the account because it is the right thing to do for you financially.
If you are planning to apply for credit in the near future, especially for a major purchase such as a home or car, you should use caution in closing accounts. You want to be sure your utilization rate does not change and cause a dip in your credit scores during the application process.
Finally, consider if those open accounts are an open temptation for you to overspend. If so, it’s better to close the accounts and avoid going deeper into debt. That is much worse than having your scores drop a little because of a change in your utilization ratio.
I know it is contrary to virtually everything you hear and read, but don’t obsess about credit scores. Instead, do what is best for you financially and emotionally.
Thanks for asking.
- The "Ask Experian" team