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Plan Well, Retire Well

Saving and investing your money

Should I cancel this credit card? Will it hurt my credit score?

This is probably the most common question I get about credit. A person has a credit card she's no longer using, and she's thinking about canceling it. But because we're all so concerned about our credit scores today, she wants to make sure that cancelling it won't hurt her score.

Years ago, the recommendation was clear: cancel any credit card you aren't using. But today, the issue is more complex. Whether canceling a credit card will hurt your credit score depends on several things.

Amounts Owed: Utilization Ratio

Part of your credit score (about 30%) is based on "Amounts Owed." One of the factors considered here is, What proportion of your available credit lines are you using?

If you have any individual credit card charged up close to the limit, you'll lose points because your "usage ratio" is too high. And you'll lose points if, looking across all your credit cards, you're using too much of the combined credit limits. What's too much? Transunion, one of the three major credit reporting agencies, says that the average proportion of balances to credit limits is 34%, so you want to be substantially below that. I've heard that less than 10% should be your goal.

Canceling the card could hurt you, because your utilization ratio may go up when you lose that credit line. This is especially true if your card has a high credit limit and you charged little or nothing on it, .

Lots of people don't realize that the credit scoring algorithm can't distinguish between a balance that you're carrying from month to month, and one that you'll pay off when you get the bill. If you're applying for a mortgage or a new car loan, don't put a big charge on your credit card even if you plan to pay it off before the due date. The credit card might report to the credit bureau on a day when that huge balance is on your card, making it look like you're carrying a large balance in relation to your credit limit.

How much this will affect your credit score will depend on the other information in your credit history.

Amounts Owed: Number of accounts

You know that having too many credit cards is not a good thing; so does your credit score. This is another factor in the "Amounts Owed" part of calculating your credit score.

The average credit report shows 4 or 5 bank credit cards (as opposed to store credit cards). A good goal is to be no higher than that.

Length of Credit History

Length of credit history determines about 15% of your credit score. You gain points for having a long credit history. Although negative info can only stay on your credit history for seven years, good stuff can stay on forever. So my credit history shows that I've had one particular credit card since 1990. Only seven year's worth of payment history is reported, but the date I opened the account will stay there as long as I have the account. That earns me a some points on my credit score. Canceling that account could take away those points, especially if my other credit cards were opened much more recently.

Final tip

Your credit score is simply a reflection of all the information that's in your credit history. Rather than paying to get your credit score, or paying for a service that lets you access it, start by getting a free copy of your credit history from each of the three major credit reporting agencies. Use the REAL authorized website to get them, at Make sure all the information is correct, and follow the instructions on the report to dispute incorrect entries. Paying your bills on time is the single most important thing you can do to have a good credit history. And keeping your balances low could be the 2nd most important thing. Take care of your credit history, and your credit score will take care of itself.

Update 7/28/2009

Thanks to Jeff Rose, this week's host of the Carnival of Personal Finance for selecting this post for inclusion in the Carnival. Check it out, and see what other financial bloggers are talking about on his Good Financial ¢ents blog.

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