How Canceling a Credit Card Can Hurt Your Credit Score
A logical person would assume that in the process of repairing their credit and raising their credit score, it might be helpful to cancel a few of those credit cards on which they don’t have 
a balance or which they don’t use very often, if at all. However, a logical person would be completely wrong.
Let me be the first to admit that the topic of the credit score is one which defies common sense; unfortunately, it is one of the necessary evils in life that we make it a point to take care of it so that life becomes easier when it comes time to purchase a car, home or another line of credit.
For anyone who is considering canceling one or more credit cards, I caution you to think twice before doing this because it will hurt your credit score. Here’s how:
Credit Score Calculation
Your credit score is compiled referencing the following five categories:
- Payment History
- Amounts Owed
- Length of Credit History
- New Credit
- Types of Credit Used
While all five categories are weighted differently, there is one aspect in particular that is weighted most heavily. This aspect is known as the Credit-utilization Ratio. The Credit-utilization Ratio looks at the total amount of credit you have available compared to how much of that credit you have used. For example, let’s say you have $15,000 total credit once you combine all of your credit cards, and you have a total outstanding balance of $2,000.
What the credit companies are looking for is a Credit-utilization Ratio of no greater than 35%; thus, according to the example used, the outstanding total balance you should owe on your credit cards combined would be $5,250.
If you were to cancel one of these credit cards, say one with a credit line of $4,000, it would put your Credit-utilization Ratio at 60%, twice what it should be according to the credit industry, with the result that your credit score drops because you’re now seen as a higher credit risk.
In 99.9% of all situations, canceling a credit card will not raise your credit score. If your motives for wanting to cancel a credit card is to deter yourself from using it or that you never use it, there is a better way to handle the situation so that it doesn’t hurt your credit score: cut the card up. By doing this you remove the temptation to use it and keep the line of credit open so that it helps your credit score. But if you insist on getting rid of a credit card, consider the following guidelines before doing so:
Cancel the Newest Card
You have no doubt noticed that one of the scoring categories mentioned above is Length of Credit History. Because it is important that creditors see that you have a long credit history, the last thing you want to do is cancel a credit card you have had for a long time. By doing so you completely delete this piece of history so that creditors no longer can see it. Consider this: if you had to decide between two people who should get a line of credit, would you award it to the person with five years or more of credit history, or someone with one year or less? Thus, cancel only the newest card.
Don’t Cancel the Card with a Zero Balance
As the old saying goes, “if it’s not broken, then don’t fix it.” Having credit cards with zero balances work to your favor, especially in computing the Credit-utilization Ratio. This is a case where you can just cut up the cards if you want; however, leave that line of credit open.
Cancel the Card with the Smallest Credit Line
Again, this all ties back into the Credit-utilization Ratio. You want to try and have the highest credit line possible to keep your combined balances below the 35% mark creditors like to see.
Don’t Cancel Because You Think You Have Too Many Cards
While creditors do look at how many credit cards you have, it doesn’t play a huge role in their decision process, provided that you’re not carrying significant balances on every one. You could have 10 credit cards and a credit card company would give you another one as long as your Credit-utilization Ratio fell below 35%.
When you get right down to it, if you pay your bills on time and don’t let the spending on your credit cards get out of hand, you won’t have to worry about your credit score other than to make sure the information on your credit report is correct. Canceling credit cards will hurt your credit score rather than help it, so hold onto them, put the cards away with your financial records or cut them up, but don’t cancel them.
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by Dan Seitz
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by Chris Martin
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by Neil Hayashi
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