If you have a collection of seldom-used credit cards that seem to be multiplying in your wallet — or you have a credit card that you continually overuse — it may seem like the smart thing to do is to cut up these cards to streamline and control your credit usage. However, because of the effects on your credit score, there are actually very few reasons to ever cut up a credit card. Here's why:
- Credit Utilization – Creditors look at your credit utilization – the credit you use compared to your total credit available across all sources – as a major predictor of risk. A ratio of less than 10% is preferred, and ratios of greater than 30% may be considered danger points. Canceling a card automatically reduces your available credit, and thus raises this ratio.
One way to blunt this effect is to open a different credit card to make up the difference in credit availability, but an even better way is to request a raise in the credit limit of an existing card. This limits the effect on your credit score while consolidating credit card clutter.
- Length of Credit – A longer history of accounts implies greater stability and less risk; canceling a card reduces the length of your credit history. This is another reason why raising the limit on an existing card might make more sense than opening a new account.
- Outstanding Balance –Never close a credit card with an outstanding balance. Your credit limit and total available credit goes to $0, and with an existing balance and no credit limit to attach it to, it gives the appearance of a maxed-out card – which is highly damaging to your credit score. Pay off any balances and verify that there are no pending charges before closing an account.
Given all that, why would you ever want to cut up a credit card? There are some valid reasons.
- Identity Theft or Fraud –In this case, you will want to close the card before any more damage can be done. Your cardholder will work with you – they don't want any more fraudulent use either, since they are on the hook for it.
- Disproportionate Fees and High Interest Rates – Any card that costs you money and just sits in your wallet is pointless. There is a variety of cards that have little, if any, annual fees that you can replace it with if you need a new account. Of course, if you pay off your card monthly and leave no balance, interest rates do not matter.
- New, Seldom-Used Card– Cutting up a card with little use and not much history has a minimal effect on your credit rating, assuming it does not tank the credit utilization.
- Invalid Card – For example, if you have a store credit card from a big box or department store that no longer exists, there is no reason to keep it. In case of an acquisition, you need to find out if the card is still valid before cutting it up, or if it will be replaced with a new card under the new owners.
Note that overspending is not listed – you should find a different way to control your spending. Cutting up the card and closing the account to achieve this is a poor choice. For one reason, if you are overspending, you probably have a balance to deal with first. Remember – if you are in a hole, stop digging.
While you can call to close your account, you should always follow up with a letter to the card issuer to verify that the card has been canceled.
So, if after reading all of this you decide that you would like to limit the number of credit cards you have, sharpen up the scissors and have at it – but do not forget to verify the effect on your credit score.
If you would like to monitor your credit to prevent identity theft and see your credit reports and scores, check out our credit monitoring service.