This Will Not Hurt Your Credit Score

Category: Finance.

We have an article that details the benefits of canceling old, but is this, unused credit cards always a good idea?

There are times when keeping a credit card line open is actually more beneficial to your overall credit health than closing it. The answer to that is no. One occasion when you might want to hold off on canceling those older credit cards is when you plan to apply for a major loan. The reasoning behind this is that closing credit line accounts, especially those that you paid on time and in full, can actually lower your credit score. Major loans include such things as a home loan, boat loan, car loan, or other loans in excess of a few thousand dollars. Paying down accounts that still have a balance is important to your credit score, but simply closing paid off accounts will not help you improve your credit score at all. You may be saying to yourself: That doesn t make sense!

As mentioned above, canceling a large amount of unused credit may actually hurt your overall credit score. Here is how this works. The reporting agencies use many different factors when figuring out your credit score and one of the factors that they use is the total amount of debt you have on your credit cards and the revolving accounts that you have divided by the total amount of debt available on those accounts. It has to do with how credit bureaus calculate your score. Once these calculations are done, a number less than 1( one) will occur. The lower this fraction is the better. This fractional number is one way they use to judge your credit worthiness.

To help you better understand this, if the resultant number was exactly 1, then that would mean that your outstanding debt is equal to your available credit and you would be at the maximum level, or maxed out for credit. To take this a step further: If you cancel an old credit card that has a$ 5, 000 limit( but no current balance owed on it) you will still have the same$ 5000 in current debt( see above example) but you only have$ 10, 000 in your credit lines( as compared to the$ 15, 000 mentioned above) . For example, if you had$ 5000 in current debt and you had$ 15, 000 in your various credit lines, you would divide$ 5000 by$ 15, 000 and you would get 1/ This means you are currently using 1/ 3 of the credit that is currently available to you. When you do the math you come up with the fraction of. Keep in mind that the closer you get to the number 1, the less attractive you are for future credit. In other words, you are using the credit that is available.

The best advice for anyone contemplating a home or auto loan is to keep the credit lines that you have until after you have finalized the loan itself. If you are not planning a major loan activity and the balances on your old cards is zero, go ahead and close them out. Then it is safe to cancel the card. This will not hurt your credit score.