Is Cancelling Credit Cards Really Bad for Your Credit?

[Ro_Laren]

I've always heard that cancelling credit cards is bad for your credit. Is that really true? Or is it an old wives tales? Or is it a rumor started by the credit card industry?

My boss spoke to her accounting office today and they did not know. They thought that it could potentially be a good thing to have a lot of credit open in your name (if you have a card, but a $0 balance on it).

I would think that having too much credit in your name could potentially be bad. For instance, if you have a lot of credit cards (w/a $0 balance) and you wanted to get a mortgage... would the banks really want to give you one if you already had a lot of credit in your name? Would they want to give you say $300,000 credit if you already had $10,000's of credit on credit cards & you didn't have a high paying job?

 

[RoJoHen]

Different credit agencies calculate your credit differently. I've heard it's bad to cancel credit cards as well, though I can't figure out why that would be. I've also heard that it's bad to have a $0 balance on an open credit card. I've also heard that it's bad to only make the minimum payment. I've also heard it's bad to use too much of your available credit (if I have a $5,000 credit limit, why the hell would using $4,000 of that limit affect my score?).

So, really, who the hell knows? It's bad for your credit score just to check your credit score! The whole fucking thing is stupid.

 

[Sean Aaron]

You're correct in your assumption, Ro Laren. When your suitability for further debt is determined your card balances are regarded as if maxed out so even if you have nothing on them they will count against your score.

What is bad is not cancelling the cards, but establishing a pattern of spending on cards and then transferring a balance to a new card and cancelling the old ones: revolving credit. Companies tend not to regard that as a good thing.

 

[Lindley]

So, really, who the hell knows? It's bad for your credit score just to check your credit score!

I don't think inquiries made by you affect anything, only inquiries made by other companies (because they may indicate you're attempting to take on more credit).

 

[Mr. Laser Beam]

When your suitability for further debt is determined your card balances are regarded as if maxed out so even if you have nothing on them they will count against your score.

Actually, it's the other way around. The more available credit you have, the BETTER your credit score is.

 

[Lindley]

To a limited extent. You credit score can be lowered by having too few credit cards, it can be lowered by having too many credit cards, it can be lowered by using too much of your credit, it can be lowered by using too little.

The bottom line is that if you maintain average habits and make your payments on time, you'll probably have a decent score.

 

[RoJoHen]

So, really, who the hell knows? It's bad for your credit score just to check your credit score!

I don't think inquiries made by you affect anything, only inquiries made by other companies (because they may indicate you're attempting to take on more credit).

But it shouldn't affect your score one way or another until you actually DO take on more credit. I have a friend who was unable to buy a house because he had checked his credit too many times (never actually did anything with it, just wanted to check his score) in too short a time.

 

[Robert Maxwell]

I've always heard that cancelling credit cards is bad for your credit. Is that really true? Or is it an old wives tales? Or is it a rumor started by the credit card industry?

My boss spoke to her accounting office today and they did not know. They thought that it could potentially be a good thing to have a lot of credit open in your name (if you have a card, but a $0 balance on it).

I would think that having too much credit in your name could potentially be bad. For instance, if you have a lot of credit cards (w/a $0 balance) and you wanted to get a mortgage... would the banks really want to give you one if you already had a lot of credit in your name? Would they want to give you say $300,000 credit if you already had $10,000's of credit on credit cards & you didn't have a high paying job?

Several factors go into calculating your credit score:

1. Number of available credit lines. More is better.
2. Average age of credit lines. Older is better.
3. Total debt. Less is better.
4. Utilization of credit. Less is better.
5. Number of hard inquiries. Fewer is better. Hard inquiries only occur when you apply for credit.

Closing a credit card account dings you on points 1, 2, and 4, which will likely outweigh the benefits of reducing your total debt load.

Income does not actually factor into your credit score at all, as credit bureaus have no way to track this. It does matter when applying for credit, though. A high, verified income can offset a crappy score in some instances.

 

[Lindley]

I have a friend who was unable to buy a house because he had checked his credit too many times (never actually did anything with it, just wanted to check his score) in too short a time.

I'm doubtful that was the complete reason. The credit reports explicitly state which inquiries could affect your score and which could not; the ones made directly by you, or in your name (such as through freecreditscore.com) are in the "could not" category.

By the way, freecreditscore.com is exactly what it says it is....so long as you cancel within 7 days. If you don't, it's just as expensive as manually buying your credit score every month from all 3 agencies. On the plus side, you can cancel online without having to deal with phone reps.

 

[Sean Aaron]

When your suitability for further debt is determined your card balances are regarded as if maxed out so even if you have nothing on them they will count against your score.

Actually, it's the other way around. The more available credit you have, the BETTER your credit score is.

That's completely retarded. Sure as hell doesn't do you any favours in the UK I can tell you!

 

[RoJoHen]

Closing a credit card account dings you on points 1, 2, and 4, which will likely outweigh the benefits of reducing your total debt load.

So given the option of closing a credit card or just leaving it open with a $0 balance, you should do the latter?

 

[Robert Maxwell]

Closing a credit card account dings you on points 1, 2, and 4, which will likely outweigh the benefits of reducing your total debt load.

So given the option of closing a credit card or just leaving it open with a $0 balance, you should do the latter?

Yes, if you want the positive impact to your credit score. It really doesn't hurt you at all to have cards with a $0 balance.

 

[Lindley]

When your suitability for further debt is determined your card balances are regarded as if maxed out so even if you have nothing on them they will count against your score.

Actually, it's the other way around. The more available credit you have, the BETTER your credit score is.

That's completely retarded. Sure as hell doesn't do you any favours in the UK I can tell you!

If you have no credit at all, your score will be average but lenders will be hesitant to give you high limits because you have no credit history. A history of using credit responsibly shows you can be trusted, and thus raises your score. A history of using credit irresponsibly will of course lower your score.

All the rest is just attempts to capture that formula numerically.

 

[RoJoHen]

Closing a credit card account dings you on points 1, 2, and 4, which will likely outweigh the benefits of reducing your total debt load.

So given the option of closing a credit card or just leaving it open with a $0 balance, you should do the latter?

Yes, if you want the positive impact to your credit score. It really doesn't hurt you at all to have cards with a $0 balance.

Good to know. I think a lot of people are very misinformed about credit and the things that actually affect it.

 

[Lindley]

Keep in mind that even a card with $0 balance may incur an annual fee if there is one for the card.

 

[Sean Aaron]

If you have no credit at all, your score will be average but lenders will be hesitant to give you high limits because you have no credit history. A history of using credit responsibly shows you can be trusted, and thus raises your score. A history of using credit irresponsibly will of course lower your score.

All the rest is just attempts to capture that formula numerically.

I understand that, but what's being said here suggests that it's better for me to have two cards with £4000 available on each and potential indebtedness of £8000 than one credit card with potential indebtedness of £4000.

If I was to try to get a mortgage, having two cards with two payments of potentially £150/mo. each on top of a proposed mortgage would place me at higher risk of default in the event that my income changed. Preferring the person with two cards doesn't strike me as terribly intelligent.

 

[RoJoHen]

Well, my cards are far from having a $0 balance, so that's not something I need to worry about for a while.

 

[Lindley]

That's certainly true. The upshot is that a history of responsible spending with $8000 available shows more responsibility than a history of responsible spending with $4000 available.

 

[RoJoHen]

If you have no credit at all, your score will be average but lenders will be hesitant to give you high limits because you have no credit history. A history of using credit responsibly shows you can be trusted, and thus raises your score. A history of using credit irresponsibly will of course lower your score.

All the rest is just attempts to capture that formula numerically.

I understand that, but what's being said here suggests that it's better for me to have two cards with £4000 available on each and potential indebtedness of £8000 than one credit card with potential indebtedness of £4000.

If I was to try to get a mortgage, having two cards with two payments of potentially £150/mo. each on top of a proposed mortgage would place me at higher risk of default in the event that my income changed. Preferring the person with two cards doesn't strike me as terribly intelligent.

I think it depends on who is giving you the mortgage. When looking into buying a house, I went to two banks. One of them looked at my potential debt based on the number of cards I had out at the time. The other bank only looked at the actual debt I currently had on those cards.

 

[Sean Aaron]

That's certainly true. The upshot is that a history of responsible spending with $8000 available shows more responsibility than a history of responsible spending with $4000 available.

"Responsibility" shouldn't alleviate risk. A responsible lender should always take into account whether someone can reasonably afford the maximum payments on all credit lines before agreeing a loan; not just look at their payment history.

I think it depends on who is giving you the mortgage. When looking into buying a house, I went to two banks. One of them looked at my potential debt based on the number of cards I had out at the time. The other bank only looked at the actual debt I currently had on those cards.

And the latter bank wouldn't be doing you any favours. It would be like giving you a mortgage with the payment being all your available income bar $100. Technically you can afford it, but realistically you're not going to be able to cope.