Many financial planners and credit score experts recommend that you do not cancel your credit cards because doing so will lower your credit score.
While they are technically correct, I am not listening to conventional wisdom. In fact, I am cancelling my credit cards largely because I have always had more credit cards in my wallet than the average person.
If you care about your long term credit score, financial health, and reducing your risk of identity theft, you should follow my lead and cancel all but one credit card.
Canceling Your Credit Cards Hurts Your Credit Score
Closing credit card accounts does have a temporary negative effect on your credit score. Your credit score is based on a host of factors such as length of credit history, amounts owed, types of credit, amount of new credit, payment history, and other factors.
The longer you have had old credit card accounts typically means you have a long credit history. This information is held with Fair Isaac Corporation, which issues a FICO Score, the most widely used credit score in the nation.
So, if you close a long standing account, you will receive a small ding on your credit score because it will look like you have not been trustworthy for a long time.
Closing a credit card account will also raise your credit utilization rate which is also referred to as the percentage of your credit limit that is available for use.
For example, if you have four credit cards with credit limits of $10,000 each and you have one card with a $5,000 balance and three with $0 balance, your credit utilization rate is 12.5%. But, if you close the three credit cards with zero balances, your utilization rate will jump to 50% lowering your credit score based on the formulas the credit bureaus use ($5,000/$10,000 = 50%).
Why Buck The Trend And Cancel Your Credit Cards?
There are several reasons why you should consider canceling all but one credit card…
1. The hit on your credit score is temporary
When you cancel a credit card and close the account, depending on how long you have had the card, your credit score will see a slight dip because it may now look like you have not had credit in your name for as long a period.
These factors only account for a small piece of your credit score, and you can see your score continue to rebound from that small dip as you hold your remaining cards longer. The dip is only temporary. Over the long term, you will see your credit score improve and return to a high level.
2. Reduces the risk of identity theft
Having fewer credit cards reduces your chance of identity theft. I move around a lot to different cities with my job, and had a horrible time keeping up with changing my mailing addresses because I had so many credit cards.
Eventually, I began getting tagged with credit cards that changed their fee structures including annual fees. I thought the credit cards had zero balances. But they didn’t, and annual fees and late fees were racking up because I had too many cards to keep track.
3. Keeps you from spending money you don’t have
Research shows that people spend more using credit cards despite paying off the balance every month. People spend 12-18% more when using credit cards than when using cash.
Fast food giant, McDonald’s, found that the average transaction rose from $4.50 to $7.00 when customers were allowed to use plastic instead of cash in its restaurants.
There is a risk that you will spend more money if you have more credit cards in your wallet and more available credit to your name. Keeping the number of credit cards low is one way to keep your spending in check.
The benefits of closing credit cards that you do not use far outweigh the negative consequences. The experts are right, your credit score will suffer a bit in the near term, but it will soon recover.
You will have fewer credit cards, be less tempted to overspend, and more protected from identity theft in the long term. The average American has over four credit cards in their wallet. Nothing good can come from having that many.
The fewer credit cards that you have are better, and that is why I am canceling all (but one) of my credit cards.
This is a guest post by Hank Coleman who is a staff writer for CreditScore.net. Hank is the founder of several financial websites and a staff writer for several blogs as well. He holds a Bachelor’s Degree in Business Administration, a Master’s in Finance, and is currently studying for his Certified Financial Planning (CFP) credentials. Be sure to follow Hank on Twitter.