Prime Rate Credit

I remember when I was in my early twenties, trying to pick up the mess my credit score and finances had become after I found myself in over my head with credit card debt. At that time, I did not know that you shouldn’t actually cancel your credit cards, but instead you should just cut them up and not cancel them. It is only natural to want to cancel a card that you never have any intention of using again, but you should really stop and think about it before you call or write the credit card company and tell them to cancel the line of credit.

I made this mistake, and although I can’t be sure if it really “hurt” my credit score by cancelling the cards rather than just cutting them up and never charging anything on them again, I have a feeling it didn’t make matters any better when it came to my credit score, or FICO score. So what sense does it make that cancelling credit cards doesn’t help your credit score, and in fact may hurt it? Why would creditors care if you cancelled a card vs. never charging anything on it again?

Well, as with everything financial, it’s not a 100% given that your score will be hurt or hindered by cancelling vs. cutting up, but most financial whizzes do say that to be safe you should not cancel. You see, part of your credit score is your “total available credit line”, and that is bounced off the amount you actually have charged on that available credit line.

If you actually cancel a credit card with say, a five thousand dollar limit on it, you’re essentially taking down that “available credit” number and increasing your ratio of available credit to credit used, which is not favorable in the eyes of a prospective lender, nor is it to your credit score that many financial companies would be looking at to determine whether you’re a good credit risk or not.

Now it makes a little more sense, doesn’t it? So, if you keep that five thousand dollar credit card around and don’t cancel it, you’re essentially bumping up the available credit you have on your report, while the credit utilized looks smaller, and creditors will look at this as you being more financially responsible, as well as more able to take on additional credit.

Much easier to understand now, isn’t it? If you’re worried about yearly maintenance fees on your credit card still being charged, you should call the creditor and discuss this, and whether they can be waived if the card will not be used again. But, in the end, if the yearly fee is still charged, it may be worth paying the thirty bucks to keep your available credit number up. This is another reason why yearly fee credit cards, unless you’re getting something in return, like say airline miles for purchases, are not a good idea.