So you’re thinking about cancelling your credit card and have another thing to worry about: your credit score. Whether you have too many cards or whether you can’t get your spending habits in check, you shouldn’t forget the potential damage that can be caused to your credit score, and why it matters.
Why It Matters
If you’re not certain as to why a credit score even matters, let’s look at what it means to have a credit score. A credit score is a score given to you by credit-reporting agencies that falls between 300-900. The higher up you are on that scale, the better score you have and consequentially more prone to receiving credit card offers and loans. A good position to be in especially if you’re looking to make a huge investment, such as purchasing a car or renovating your house. A credit score is also a statement on how responsible you are with your purchases, information needed by companies who act as lenders. Therefore, the better score you have the better reputation you have in the eyes of lending corporations.
Calculating Credit Score
Credit score is calculated by various factors, including but not limited to the following:
- Length of credit history
- Payment history
- Types of Credit
- Available credit and it’s use
Keeping in mind that the so called “credit” is actually just an intermediate tool to pay for something on the promise that the payment will be made. In simpler terms, credit acts as a loan. Conventional forms of credit include credit cards, mortgages and student loans.
Cancel the Card, Compromise the Score?
One immediate and a surefire way to harm your credit score is through credit utilization when cancelling a credit card. Credit utilization is a ratio between credit limits and balances, measuring the amount of credit limit that is being utilized. You may not want to cancel your card right after a balance transfer, which will increase your utilization credit about the normal 35%. To avoid this, you want to make sure your new card is not in the process of being issued.
If the card you’re cancelling is your oldest card and your most used one, it’s bound to have a great length of credit history. For instance, if your card is eight years down the line, cancellation of the card will not have any abrupt effect on your score, however, may come to haunt you in later years. It’s always wise to not cancel your oldest credit card due to credit history. You would want to cancel a card that’s a few months into your purchases than your very first one.
Your score is only ever bound to dramatically drop if you’re used to missing deadlines and missing fees. Put this on the forefront of your mind before neglecting those small payments, staying true to the deadlines!