The financial world we live in is a scary one where many people are no longer comfortable holding onto credit cards with high limits that might tempt them into making purchases they can’t afford – especially if they’ve already got a mediocre credit rating due to credit debt! Some people have even asked if it’s possible to boost their credit score by canceling credit cards.
It’s not entirely crazy. Once you’ve taken care of the debt, eliminate the possibility of getting into more debt by closing cards. Unfortunately, that’s not how it works in the credit world.
In fact, canceling cards can actually have the opposite effect and dramatically lower your score, making you less likely to qualify for loans when you need them. How is this possible?
It’s because your credit rating is based on the amount of money you have to spend weighed against the amount of money you already owe. Canceling cards may seem like a bright idea to simplify your life and keep you from spending, but it also removes a valuable line of potential money you could tap if you needed to.
Think about it like this. Right now you owe $20,000 in student loans and $100,000 on a mortgage. Luckily, you’re not underwater and your house is worth $120,000, but that essentially brings you back to zero. Your five credit cards give you a $50,000 combined limit, of which you use $5,000 on a monthly basis.
That leaves you with $45,000 potential dollars. Close your credit cards and you lose this money. Never mind that you didn’t actually have it in the first place and it would end up costing you an arm and a leg if you did have to use all of it – the point is (as stated above) it’s money that you could tap if you needed to.
Now, this isn’t the end-all be-all. Ultimately, you have to decide what’s best for you, and simplifying your life might take precedence over the need to keep your credit score hovering around 740.
Plus, there are ways that you can compromise and still achieve much of the same effect. Canceling that $2,000 Sears card and increasing your Visa by the same amount removes clutter and keeps you from losing any of that potential money.
Just think carefully about what you’ll lose and what you’ll gain – whichever way you decide to go. And think long and hard about your future needs. Starting and canceling a lot of accounts is not something you want to be doing if you plan on taking out a mortgage – or a loan to pay for your kid’s college education – any time in the near future.
Does Canceling My Credit Cards Boost My Credit Score? was originally featured on Quizzle Wire
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