Canceling credit cards seems like a great idea to curtail all the impulsive shopping and splurging. When these pieces of plastic are adding unnecessary dollars to the monthly bills, many think of getting rid of the temptation by canceling their credit cards. But canceling credit cards can impact more than just the spending patterns. They can affect how the card holder would be perceived by future lenders.
On an average, a person in the US holds about 8 credit cards at any given time. During tough times, when every dollar counts, curbing the temptation to use this strip of plastic can be a difficult task. However, canceling credit cards to make sure that the spending remains within control is not exactly the right thing to do in every situation. Although this may come as a surprise, closing credit cards can affect your credit score negatively.
To understand how, it is important to know that the credit score takes into consideration the unused lines of credit that any individual has. The score is affected by how much of the total available credit has actually been used up. Along with the on time payment record, low default rates and duration of the relationship with the creditors, the unused credit percentage affects the credit score – the higher the percentage, the better the credit score would be.
If a person has 3 credit cards with three lines of credit and he or she has outstanding payments on just one of these, the percentage of debt as compared to available credit remains low and boosts the credit score. However, if he or she cancels the two cards that have zero balances, then the percentage of used up credit zooms upwards. It makes sense to hold on to the credit cards on which balances have been repaid on time all through, as proof of creditworthiness.
This is especially important if there is a likelihood of you needing a fresh loan in the near future. The new lender will be checking on the recent activities of any prospective borrower and the fact that he or she cancelled a perfectly good credit line with unused credit will not instill confidence.
If having credit cards is inflating expenses and you are unable to curb the spending, then canceling a few with zero balances may be an option. However, it may just be a better idea to simply keep these credit cards out of easy reach to curb uncontrolled spending.