That's the short answer. But since virtually everything that makes up your credit score depends on something else -- depends on your credit mix, the number of cards you carry, the length of your credit history, your rate of credit utilization and myriad other things -- there is a longer answer, meaning that it is tough to pin it down to one specific thing.
In most cases, canceling a credit card won't help your credit score. In fact, it may actually hurt your score. You see, your credit score depends on how you shake out in five different credit-scoring categories, each weighted differently when calculating that score.
What counts in a credit score?
This chart shows how Fair Isaac Corp. values the various parts of your credit management to determine your credit score.
Source: Fair Isaac Corp. Canceling a credit card potentially can hurt you in at least two of the five categories -- and maybe even a third.
Credit-utilization ratio is key First, canceling a card could upset your credit-utilization ratio, the second most heavily weighted category in most credit scoring algorithms.
For example, assume you have three cards with total available credit of $20,000. Assume
further that your outstanding balances total no more than $6,000 of that available credit at any one time. Since creditors like to see a credit-utilization ratio of 30 percent to 40 percent or less, you're in good shape. Now, assume that you cancel a card with a zero balance and a $10,000 credit limit. Suddenly, your utilization ratio jumps to 60 percent, and your credit score drops. As counterintuitive as that seems, that could happen. Building good credit takes patience and persistence. But what about quick fixes? Many of these tricks are scams. But there are a few sneaky ways to legitimately give your score a boost when needed. Furthermore canceling that card could result in a double whammy to your credit score, because each card is scored individually, and then all your cards are scored together. If you've just canceled the card with a zero balance, you've lost a great individual score. Regardless, if you still want to cancel a card, make sure to pay down your other balances to keep that rate in line.
Second key is "Older credit is better" If you do cancel a card, you can compound your error even further by canceling the card that you've had the longest period of time and on which you've been making regular payments. By canceling an old card, the length of your credit history on open accounts will grow shorter. There's at least one more stratigy to consider if you are dead set on cancelling a card to help your spending habits. If you're intent on canceling a card, cancel a younger card or cancel one on which the credit card issuer doesn't report the credit card limit. You can find out which ones by getting a copy of your credit report. When you check your credit report there are codes that the credit bureau will tag on your file.
Most common reasons consumers are denied credit:
• Serious delinquency.
• Serious delinquency and public record or collection filed.
• Time since delinquency is too recent or unknown.
• Level of delinquency on accounts is too high.
• Amount owed on accounts is too high.
• Ratio of balances to credit limits on revolving accounts is too high.
• Length of time accounts have been established is too short.
• Too many accounts with balances.
One of the reason codes (reason No. 4) tells you if having too many cards has hurt your score. Common sense should tell you that the older you are and the better you manage your credit, the more cards you can have in your wallet before you reach the magic number that triggers the reason code.
Have a Healthy Mix:
Fair Isaac and VantageScore look for a healthy credit mix, a mix that might include a mortgage loan, a car loan, maybe a store card or two, three or four MasterCard or Visa cards and a home equity line of credit, or HELOC, for example.
Credit Cards are the Key:
They seem to be the key to the kingdom when it comes to credit scores: Don't cancel your cards!! Pay them off!! And after you've done that, don't send them back. Cut them up. Do that, and you have a zero balance enhancing your credit utilization rate. Do that, and you maintain your credit history on open accounts. Do that, and your credit mix looks good and you still have the available credit on the card you cut up. All you have to do is ask for a new card when you need it. Nevertheless, if you have a compulsion to cancel credit cards, do it the right way. First, cancel your department store cards; then cancel the newest MasterCard or Visa with the lowest credit limit, making sure to close the card from the company that doesn't report credit limits. Make sure to keep your credit-utilization ratio in line as you cancel, paying down balances on your other cards, if necessary, to keep it in line. Score one for the consumer!
Please feel free to call for questions ! Prosperity Financial 303.666.6550 !
*we are not a credit relief or credit counseling company, we just speak from experience!
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