Should I cut my credit cards up, so I Never use them Again?
Effective credit card utilization makes up 30% of your score so Listen UP! We often hear our customers say, “I’m closing this credit card and cutting them up” believing this will help their credit. However, I’m here to tell you that it helps in some cases, but hurts in others. Here are some helpful tips.
If You Don’t use it, Don’t Lose it.
One of the criteria we are scored on by the credit repositories is length of credit history. So don’t close that credit card even if you haven’t used it for a long time. Closing out old credit cards shortens that history, and consequently makes your credit viewed as riskier than borrowers with longer histories.
If there’s a balance, don’t close it.
This is the proverbial frustrated couple that says, “I’m closing out those credit cards and cutting them up”. Closing a credit card with a balance is like a double whammy. When you close a credit card with a balance, your total available credit and credit limit report as $0, but now has a balance. So the credit card that had available credit on it now looks like a maxed out credit card, which is very bad.
If your credit card is your only one, Don’t close it
Since part of your credit score (10%) is based on the different types of credit you have, keeping a credit card in the mix will add points to your credit score. Leave your credit card open to show that you have experience with this type of revolving account. Frequently, if we are trying to get a customer to qualify for a mortgage, and they score just short of the 640 minimum score, we often direct them to a bank that offers a secured(one that requires a deposit) credit card to raise their score to qualify.
So after all that, when should I close one?
Close credit cards if you have enough other revolving accounts with low balances and/or the terms or conditions are such that the drawbacks or costs outweigh the benefits of having them. In this market, a couple of points to your score means a lot in terms of qualifying for a mortgage or getting the best interest rate possible.
So to wrap it all up, in rare cases, cutting up your credit cards and never using them again helps in some cases, however, in more cases that not, its best just to have a little bit of discipline, organization and good old common sense.