3 Reasons You Should Cancel Your Credit Cards and Ignore Credit Scores

by Guest on December 13, 2010

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.netHank 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.

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{ 9 comments… read them below or add one }

Credit Cards Canada December 13, 2010 at 3:13 pm

I guess I have to debate this “3 reasons”hing, which is in fact false reasoning. The third reason is indeed a reason for some people. Not for all people. Not for a majority of people. For a minority of people, albeit a significant minority, canceling one’s credit card will reduce their overspending. Although for a minority of them, they might resort to much riskier excesses.

The second reason is perhaps more valid, but it assumes you will not use some other means of electronic payment, such as debit cards or PayPal (Hey, Gawker just recommended everyone change their passwords after being hacked, and some believe that is where a wave of Twitter spam came form). So, basically this reason to cancel credit cards is more a reason not to shop online – it is mislabeled. And the first reason isn’t even a reason – if someone should cancel his credit cards because the hit on their credit score is only temporary, then it follows that we should also run out and shave all our heads because the lack of hair on our heads is only temporary. Temporary damage is not a reason to do something; it is a reason to avoid doing something unless there is a really good reason to do it.

Hank Coleman December 14, 2010 at 2:09 am

I can see your point about temporary damage is not a reason to do something. You are right. But, I see people using the “ding on your credit score” as a reason why not to cancel credit cards. It is only temporary and you are right, “temporary damage is not a reason to do something”. It is also not a reason not to do something as well.

MirsadH December 14, 2010 at 7:41 am

Identity theft is impossible to avoid even if you do not own a credit card. The best tip is to avoid prepaid credit cards when traveling to another country.

Cheapskate Sandy December 14, 2010 at 9:42 pm

Unless you are applying for a job, getting car or life insurance, making a major purchase, or carrying a balance on your credit cards, your scores won’t matter. Doing any of the above? They count.

Briana Ford December 14, 2010 at 6:06 pm

To me, canceling the cards is a bit extreme. Sure, get rid of them. Pay off the debt, and don’t use them. The fact of the matter is, there are some things you need credit for.

Hank Coleman December 15, 2010 at 2:59 pm

You are right. It is impossible to avoid, but having fewer cards can decrease your chances.

Hank Coleman December 15, 2010 at 3:01 pm

I definitely agree. There are things that you need a credit card for such as renting a car, hotel rooms, etc. But, that doesn’t mean that a person needs four or five credit cards. One will suffice and may keep you more honest. Paying off debt is great, but if I have a lot of open credit available to me, I may be tempted to dig my debt hole again.

Alex Vays May 2, 2011 at 10:17 pm

Excellent post. I commend the author as he sounds like an intelligent and well accomplished individual. I agree completely. Well said.

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I’m going to be uploading my own version of this as soon as I’ve
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