Often, when someone has clawed and dug their way out of debt, they destroy their credit cards and cancel their accounts. Many do this because they blame the credit cards and look at them as plague-carrying rats. In other words, they fail to acknowledge that the credit card is an inanimate object which has absolutely no power to make them do anything – instead, they use them as the scapegoat and have learned little from their experience except how much it stinks to be in debt.
Admittedly, there are those who destroy their cards and cancel their accounts because they absolutely HAVE TO remove any and all temptation to assure they never go back down that rabbit hole. They recognize they just don’t have the willpower, and you have to respect that.
Whatever motivates a person to want to take these extreme steps, canceling their credit cards is the absolutely worst thing they can do in the long run. To understand the impact of canceling a credit card on your credit score, you need to understand how that number is derived. There are five factors that go into calculating your credit score:
- Payment history
- Credit utilization
- Length of credit history
- New accounts
- Credit mix
Of these factors, your payment history carries the most weight in determining your score, followed by credit utilization and then the length of your credit history. New accounts and your credit mix (having a mix of loans, credit cards, mortgages etc.) carry the least weight.
Canceling a credit card, obviously, directly affects payment history, credit utilization, and length of credit history – in other words, canceling a credit card completely nullifies the first two and it puts an end to the last one.
Your credit utilization is a measure of your debt against your available credit and, ideally, it should be kept at 30% or less. If your utilization exceeds that threshold, your score could take a hit. Therefore, if you have a total line of credit worth $10,000, you should make it a point to never carry more than $3,000 in balances at once.
If the temptation to go on a shopping spree with a newly zeroed-out credit card is far too strong, let me make a suggestion: take a look at your monthly bills (utilities, insurance, cell phone, etc.) and choose the ones that don’t vary too wildly and total less than 30% of your available credit. Put those bills on autopay with your credit card and pay that ONE bill in full each month when it arrives; then take that card, fill a Ziploc bag with water, place your credit card inside the bag, and chuck it all into the freezer . . . but don’t cancel the account. If you feel the “need” to use that card, the time it will take to chisel away the ice or have it thaw SHOULD be enough of a deterrent. You think I’m kidding, don’t you? I’m not.
Keeping that credit card open, used, and paid off each month will do wonders for your credit score. Conversely, canceling that card will stall any efforts to improve your score. The old saying of “credit never sleeps” is true, and many have learned it means how debt and its interest are unrelenting, but with today’s article, we should take it to mean that it never stops HELPING us improve our credit scores if we control it.