ALL >> Debt >> View Article
When Not To Cancel Credit Cards

We have an article that details the benefits of canceling old, unused credit cards, but is this always a good idea? The answer to that is no. There are times when keeping a credit card line open is actually more beneficial to your overall credit health than closing it.
One occasion when you might want to hold off on canceling those older credit cards is when you plan to apply for a major loan. Major loans include such things as a home loan, car loan, boat loan, or other loans in excess of a few thousand dollars.
The reasoning behind this is that closing credit line accounts, especially those that you paid on time and in full, can actually lower your credit score.
Paying down accounts that still have a balance is important to your credit score, but simply closing paid off accounts will not help you improve your credit score at all. As mentioned above, canceling a large amount of unused credit may actually hurt your overall credit score.
You may be saying to yourself: That doesn't make sense!
Here is how this works. It has to do with how credit bureaus calculate your score.
The reporting ...
... agencies use many different factors when figuring out your credit score and one of the factors that they use is the total amount of debt you have on your credit cards and the revolving accounts that you have divided by the total amount of debt available on those accounts. Once these calculations are done, a number less than 1 (one) will occur.
This fractional number is one way they use to judge your credit worthiness. The lower this fraction is the better. To help you better understand this, if the resultant number was exactly 1, then that would mean that your outstanding debt is equal to your available credit and you would be at the maximum level, or maxed out for credit.
For example, if you had $5000 in current debt and you had $15,000 in your various credit lines, you would divide $5000 by $15,000 and you would get 1/3. This means you are currently using 1/3 of the credit that is currently available to you.
To take this a step further: If you cancel an old credit card that has a $5,000 limit (but no current balance owed on it) you will still have the same $5000 in current debt (see above example) but you only have $10,000 in your credit lines (as compared to the $15,000 mentioned above). When you do the math you come up with the fraction of ½. In other words, you are using ½ of the credit that is available.
Keep in mind that the closer you get to the number 1, the less attractive you are for future credit.
The best advice for anyone contemplating a home or auto loan is to keep the credit lines that you have until after you have finalized the loan itself. Then it is safe to cancel the card.
If you are not planning a major loan activity and the balances on your old cards is zero, go ahead and close them out. This will not hurt your credit score.
Add Comment
Debt Articles
1. Active Packaging Market Projected To Reach $35.7 Billion By 2032Author: Rutuja kadam
2. Trusted Lawyers On The Sunshine Coast: Expert Legal Support When You Need It
Author: buckleyhawkins
3. Debt Collection Services In India
Author: DEALZ MT
4. How Contractors Can Secure Funding Despite A Bad Credit Score
Author: Bad Credit Business Loans
5. Exploring The Intricacies Of Cross-collateralized Loan Structures For Businesses
Author: Risa Beand
6. How To Choose The Best Elementary School For Your Child In Canada
Author: USCA Academy
7. Why Personal Loans Are The Best Option For Vacation Financing
Author: Brajendra Kumar
8. How To Improve Your Home Loan Eligibility Calculation
Author: Maya
9. How Personal Loans Can Help In Debt Consolidation And Financial Planning
Author: Brajendra Kumar
10. Repayment Options And Plans
Author: Brajendra Kumar
11. Navigating Bad Credit Car Loans In Ottawa: A Comprehensive Guide
Author: Anna Emma
12. Understanding Personal Loan Interest Rates
Author: Brajendra Kumar
13. Dynamics 365 Business Central Online Training | D365 Business Central
Author: Susheelvisualpath
14. Why You Should Review Your Home Loan Periodically?
Author: Tarun Diwedi
15. How Personal Loans Can Help You In Financial Emergencies
Author: Brajendra Kumar