Is cancelling a credit card good or bad?

credit-card-handOne of the most common credit tips we see these days is the idea that you shouldn’t cancel a credit card because it will hurt your credit score. This “tip” makes for a good headline, as it seems so counter-intuitive to think that cancelling a credit card could actually be a bad thing. After all, getting rid of old credit accounts we don’t use anymore should be a good thing, right?

So, which is it? Is it good or bad to cancel a credit card account?

The answer is not nearly as simple as some credit “experts” would have you believe. The real answer is: it depends. It depends on your current credit score, in particular the length of your credit history and what percentage of your credit lines you are using. It also depends on whether you plan to apply for credit in the near future. And, finally, it depends on whether closing an account will give you greater peace of mind.

Let’s look at each of these factors to help you decide if canceling a credit card is good or bad for you:

  • How’s your current credit score? If you have a high credit score and you choose to cancel a credit card, your score might go down slightly in the short term, but not enough to really matter. You will remain a desired customer for any financial institution. On the other hand, if your credit score is not so good, the small ding against your credit score for closing a card will have more of an impact. However, you’ll still want to consider the next question:
  • Do you have a long credit history? If you’ve been using credit for 5+ years, have multiple credit cards and a mortgage, then closing a single credit card account is no big deal. You’ve already proven over a long period of time that you can handle credit. On the other hand, if you got a credit card a year ago and have no other credit history, you should hang on to the card even if you don’t use it as you continue to build your credit history. (Unless the card has high fees, in which case, try to get a better card and then close the first.) You should also consider:
  • Are you carrying high balances on your current credit cards? If the answer is no, don’t worry about canceling one of your cards. If the answer is yes, you might want to think a little bit before getting rid of a card that has no balance. Here’s why: Part of your credit score is based on how much debt you have in comparison to the size of your available credit lines. This is called the credit utilization ratio. For example, if you have available credit lines totaling $20,000 and you have $5000 of credit card debt, you are using 25% of the credit available to you. If you cancel a card with a $10,000 credit line, suddenly you are using 50% of the credit available to you, which hurts your credit score. However, also consider this:
  • Will you need to apply for credit or a loan soon? If not, the short-term hit to your credit score from closing a card might make no difference. As long as you keep using credit responsibly, your credit score will rise again over time, and the cancelled card will not matter. However, if you will be seeking a home loan or other credit in the near future, it makes sense to wait until after you’ve been approved to cancel your card. You want your credit score to be as high as possible when seeking new credit. Finally, there is one more question to answer:
  • Will canceling a credit card give you greater peace of mind? If you’ve gotten this far and you still can’t decide whether it would be good or bad to cancel the card you’re thinking about, you should probably cancel the card.  Why? Because you obviously want to cancel the card, and if the information above makes you believe that it might not hurt you, you should do what gives you the greatest peace of mind. If you will be happier not having to think about that card, or you like the idea of your credit being “cleaner” without that open account, or you’re worried about a thief getting hold of that credit card number, then it’s probably time to get rid of it and not drive yourself crazy worrying about a minor, temporary hit to your credit score. Cancel the card and keep using credit responsibly and your score will be right back where it was in no time.