ATLANTE – We’re told not to rely on credit cards to get by, but if you cancel them, you can hurt your credit score. You want to strategize before making this move.
A few things go into your credit score, but those are the two we’re talking about: length of credit and use of credit.
- Length of credit history – 15%
- Use of credit – 30%
- Payment history – 35%
- Loan composition – 10%
- New credit – 10%
For length of credit history, the longer your credit history, the better. Credit usage is how much of your available credit you are using.
Let’s say you have a limit of $1,000 on a credit card and it has a balance of $100, that’s way better than using $800 of that $1,000.
Sara Rathner from Nerd Wallet, a financial site, help us understand why this matters when canceling cards.
“In general, we recommend that you charge no more than 30% of your total available credit limit each month. Ideally, less than 10%. So if you close a credit card, for example, your credit limit decreases But if your spending stays the same, it’s that much easier to spend more than the recommended limit on your cards.”
Almost half of Americans, 48%, think it’s a good thing to close an old credit card you no longer use. You can, but you need to strategize before you do.
Try to reduce your balances before canceling the card to compensate for this balance/credit ratio. Closing a card will result in a loss of credit score, so don’t do this when trying to get a loan. Do it well before or after so you can recover. And if the card doesn’t charge an annual fee and it costs you nothing to keep it open, it doesn’t hurt to keep it.
Don’t cancel your oldest card, the one with the longest credit history. If you are going to cancel, make a newer one.
Finally, if you have a credit card that you don’t use, the issuer may consider it inactive and cancel it for you, which will affect your credit score. Use it occasionally to keep it viable.
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