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Does Canceling Credit Cards Hurt Your Credit?

shutterstock_232260670When it comes to improving your credit score, paying down your credit card balance is one of the first steps that you should take. However, one of the mistakes that many credit card holders make is to close their credit card account once they have paid off their balance. Unfortunately, cancelling a credit card can actually do more harm than good. The following are a few reasons why you shouldn’t cancel your credit card:

1. It will increase your utilization rate

The utilization rate is the ratio of your credit balance to your credit availability. For example, you might have two credit cards that both contain $1,000 credit limits. Both cards have a balance of $500. This means that over all, you have a 50 percent utilization rate since you are using $1,000 of your $2,000 in available credit.

If you pay off one of these credit cards but not the other, then you will have a 25 percent utilization rate. But if you cancel that card, you cut the credit you have available in half, bringing your utilization rate back up to 50 percent. Your utilization rate is factored into the amount you owe, which accounts for 30 percent of your FICO score.

2. It will shorten the length of your credit

The average length of your credit history affects 15 percent of your FICO score. If you close a newer credit card, it won’t affect your score that much. However, if the credit card you cancel is an older card, then it could have a much bigger impact since this could cause the length of your credit to go down.

3. Your payment history will not change

One of the reasons some people will cancel a card after they’ve paid it off is because they mistakenly think it will eliminate that card’s payment history. They may want to do this if there were a lot of late payments on that card. However, your payment history will always remain on your credit report, so this reasoning is moot when it comes to deciding if you should cancel your credit card.

4. It will limit the diversity of your accounts

Having a number of different account types will help to improve your FICO score. In fact, your account types affects ten percent of your score. If you only have one credit card and you cancel it, then the diversity of your accounts will be limited.

These are a few reasons why cancelling your credit account can damage your credit rating. Instead of cancelling your card, practice discipline in how you use it. If this is too difficult, you could always store your credit card in a safe place or cut it up so that you don’t use it. For information on how to improve your credit score and piggybacking tradelines, be sure to visit us at BoostMyScore today.

Bill Airy

About the Author:

Bill Airy is the CEO and Founder of BoostMyScore. For over 12 years he has helped American consumers get a second chance at a better financial life by helping them to improve their credit score. He regularly publishes helpful content on this Blog to educate others about Credit Scores and best practices when trying to improve them.

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