You and Your Credit Cards

There is enough plastic out there to keep Benjamin Braddock in business for life. Don’t remember the famous line from “The Graduate?” Never mindnearly everyone has a credit card. They’re sent to college-bound high school seniors and even some much younger. I did a little research recently on cancelling credit cards, and while I was hoping I would find simple yes or no answers to my questions, there are a number of variables to consider when making this decision.

FICO scores are used to gauge your worthiness as a debtor. A FICO score is a credit score derived from the credit model developed by Fair Isaac Corporation. The FICO score is the best-known credit score in the United States, and a version of the FICO score is calculated by all three of the major credit bureaus from reported information. A higher FICO score indicates better credit, and a FICO score below 600 is considered poor. Your FICO score is based on the following:

  • 35 percent on your Payment History
  • 30 percent on Amounts Owed
  • 15 percent on Length of Credit History
  • 10 percent on New Credit
  • 10 percent on Types of Credit Used

Cancelling a credit card with a long credit history can downgrade your credit score, because 15 percent of your credit score is determined by length of credit history.  Therefore, if your have used a card for a long time, and that card provides a lot of credit history, cancelling it might not be the best idea.

Even closed accounts remain on your credit report for a period of seven years after being closed, and as they drop off that report, it can hurt your overall credit rating.  That being said, if you want to cancel a long-held card because you never use it, then the likelihood of the card representing a significant part of your credit history is small and choosing to cancel it should have minimal impact on your credit score.

Cancelling a card may also affect the credit-utilization ratio, a number that creditors like to see around 30-35 percent or less of your available credit. For example, if you have $100,000 of credit available, creditors like to see the utilization at 30-35(k) or less.  Closing a card without replacing the available credit loss causes your credit utilization to go higher.  If you cancel one card, you may want consider requesting a higher limit on one of the cards you intend to continue using in order to compensate for the loss of available credit.   This way you end up with the same ratio of debt to available credit, albeit with fewer cards.

If you are intent on cancelling a card because you never use it and it has a short credit history it is probably fine to do so. But there is more to consider than simply a lighter wallet. Before closing a credit card account, make sure the cards you plan to keep provide the data necessary to maintain a good credit rating.


Coleman Sheehan, CPA, MSA

Coleman is the professional consultant for Jim Blair.

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