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STOP! Don’t Cut Up Your Credit Cards if You Care About Your Credit

by Andrew C. MacDonald on April 18, 2011 · 6 comments

  

Before you cut up your credit cards in an attempt to curb spending, or purge old accounts, stop and consider the consequences. It seems rational to close off old credit card and retail accounts that you no longer use, but it may end up hurting your credit score.

When it comes to getting a mortgage, car financing, or any other credit, your current score will play a factor. Keeping your score high can save you thousands of dollars by qualifying you for better interest rates and lending products.

Credit Score Factors

There are the 5 main factors that influence your credit score:

  • 35% Payment History
  • 30% Amounts Owed
  • 15% Length of Credit
  • 10% New Credit
  • 10% Type of Credit

Length of Credit

Under the length of credit category there are a couple of metrics which impact your score.

First, how long have you had access to credit? The longer you’ve had credit and paid on time, the better.

Second, what is the average age of your various credit accounts? Again, the longer, the better.

Why Keep Old Accounts Open?

In most cases, it is best to keep old accounts open. Provided you have a good payment history on these accounts, closing them will only hurt your score. By closing an old account you will usually reduce the average age of your trade lines. In some cases, you may even shorten the length of your credit file. Keeping accounts open will also increase your total available credit which reduces your overall utilization percentage at any given time.

On the contrary, if you have a poor payment history on an old account that you no longer use, closing it may be best since it will eventually drop off of your file.

Either way, always think carefully before closing any old trades. Doing the seemingly logical thing may actually hurt your score. If you have trouble controlling your spending, you can still cut up the cards, just don’t close the accounts.

Creative Commons License photo credit: kainr

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{ 5 comments… read them below or add one }

John April 25, 2011 at 3:01 am

Great advice. I will definitely keep that in mind. I am working on my credit score for a few months and haven’t heard about this yet. Thanks.

Reply

Andrew C. MacDonald April 26, 2011 at 7:51 am

Hi John, be sure to learn more about all 5 factors that impact your credit score and learn how you can use each to boost your score. It takes time, but done properly you can make drastic improvements inside of a year.

Reply

Anon March 7, 2012 at 7:41 am

Credit isn’t the only factor in securing loans. It’s also the “debt to income ratio”. If you have 5 credit cards that are maxed out, and have a low income, nobody will lend you more money — because your debt to income ratio is high.

But let’s say you have one credit card that you pay off every month, and you have a stable, high paying job. Your debts are low and your income is high (your debt-to-income ratio is low). You will have an easier time securing a loan.

Credit card debt isn’t the only thing that affects your “debt to income” ratio. Long term loans, such as mortgages, car loans, and savings accounts also affect your “debt to income ratio”.

Reply

Harry June 13, 2012 at 11:15 pm

Best to cut them up and pay them off. Paying for everything in cash is the wise decision. Don’t follow in the foot steps of the nation. Learn from their careless mistakes of buying what they can’t afford!

Reply

Andrew C. MacDonald June 14, 2012 at 12:48 pm

Hi Harry,

Paying off your cards is a wise idea, and cutting them up so you don’t use them is okay too. But, if you close the accounts you may harm your credit score and end up paying more for other loans like the mortgage on your primary residence.

Life without debt is great, but be careful not to ruin your score along the way. You never know when a good score will come in handy.

Cheers,
Andrew

Reply

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