Avoid Cancelling Credit Cards as it Leads to a Credit Score Drop

Cancelling credit cards may prevent unnecessary spending, but there is a hidden risk. Higher credit utilisation could cause a sharp credit score drop.

Most people have a few obsolete credit and store cards gathering dust somewhere. Why not close them down? After all, cancelling credit cards seems like a logical step to take because it not only prevents over-spending, it can also stop credit card fraud from taking place. Many consumers don't realise that opting to cancel credit cards could actually result in a credit score drop. This could make refinancing a home mortgage or vehicle more expensive in the future. Of course, much depends upon how much a family owes relative to the level of credit they have available to them.

Why Cancelling Credit Cards Means a Credit Score Drop

The reason that the decision to cancel credit cards results in a lower score is higher credit utilization. Other than paying bills punctually, the percentage of a consumer's maximum credit limit that is used up is the next most important consideration. Up to 30% of a FICO credit score is determined by this measure. Should an obsolete credit or store card be closed down, the maximum amount of available credit is diminished which means that their debt ratio rises. This leads to a lower credit rating because it is interpreted as a sign of rising debt and a higher likelihood of future default.

Don't Cancel Credit Cards, Use Them Instead

Leaving a credit or store card unused won't lead to a better credit score. Craig Watts, an executive at Fair Isaac, stated that: "The accounts will still appear, but they won't be given as much weight in the credit-scoring formula as your active accounts." Rather than credit card cancellation, use up to 10% of the credit limit each month. Provided that the balance is settled in-full at the end of the month, reporting this to the three major credit reference agencies will lead to an improved credit rating.

Quick Ways to Get a Good or Excellent Credit Score

• Never max-out a credit card. Avoid using more than 30% of the allocated credit limit in a single month. This rule applies even if the balance is fully cleared at month-end.
• Request a copy of a credit report from all 3 major credit reference agencies. Check these for errors and correct them personally or with the assistance of a credit repair attorney.
• Use personal savings to pay down debt and reduce total credit utilization.
• Avoid making too many applications for credit as each search shows for a period of 12-months.
• Always pay debts punctually or within the grace period to get an improved credit score. Paying late leads to a credit score drop.

Avoid Cancelling Credit Cards for a Better Credit Score

Most consumers live under the misapprehension that closing down old credit accounts will help their credit. However, unless only a very small percentage of a person's total credit limit is used-up each month, choosing to cancel credit cards actually results in a credit score drop. It is far more sensible to use an obsolete credit or store card a few times a month for an improved credit score.

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