Over 100 Million People Are Making This Money Mistake

While canceling your credit card is a relatively simple process, you need to think about the myriad ways it may impact your financial footprint, especially your credit score.

credit cardOlleg/Shutterstock

Did you know that credit closures have more than doubled in the past five years and that, according to a new Bankrate.com report, 129 million people have no clue that canceling their credit cards will have a negative impact on their credit score?

Why are people canceling credit cards?
Bankrate.com research found the main reasons people cancel credit cards are having paid off debt (40 percent), not using the card enough (36 percent), feeling the interest rate was too high (36 percent) and feeling the annual fee was too high (28 percent).

How does it affect your credit score?
“There’s really just one main reason that canceling a credit card hurts your credit score: It raises your credit utilization ratio. That’s credit you’re using divided by credit available to you,” notes Ted Rossman, an analyst at Bankrate Cards. He further explains that ideally, you’ll keep this ratio below 30 percent. As an example, let’s say you owe $3,000 and your total available credit is $10,000. That’s a 30 percent utilization ratio, which is pretty good. But if you cancel a card with a $5,000 limit and you owe the same $3,000 – now your utilization is a much higher 60 percent.

Is it ever okay to cancel a credit card?
“To be clear, in most cases, canceling a credit card won’t have a drastic effect on your financial life. The worst-case scenario would be a cancellation that significantly raises your credit utilization ratio,” notes Rossman. “I’d also recommend refraining from making any significant changes to your credit profile when you’re about to apply for a mortgage, auto loan or another type of credit.”

He still opts for keeping old accounts open whenever possible. If you’re paying an annual fee for a card you’re not getting value from, he recommends a product change rather than a cancellation. A product change is when you call the card company and ask to downgrade to one of their cards that does not charge an annual fee. You always want to try to keep your credit score high.

What would be a good reason to cancel a credit card?
The best reasons to cancel a card Rossman notes would be if you held a joint account with a now ex-spouse or ex-business partner and canceling is the only way to untangle yourselves. Or if you have a big problem with overspending and just can’t trust yourself with a credit card. Find out if you have signs of a shopping addiction.

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Stacey Marcus
Stacey Marcus is a regular contributor to RD.com where she covers subjects ranging from penguin secrets to Jeopardy! conundrums. Stacey’s work has also appeared on FamilyHandyman.com and TheHealthy.com as well as in top regional and national outlets including Boston magazine, Boston Common Magazine, Destination I Do, Ocean Home Magazine, and Playboy.com. She earned a BA in Communications from Simmons University.