Don’t Cancel Your Credit Card
I know it sounds counterintuitive, but to cancel a credit card, even with a zero balance, may actually hurt your credit score. Closing zero balance credit cards requires a great deal of consideration. Your mysterious credit score, according to Fair Issac Corp., actually depends on a mix of five factors, each weighted differently.
Payment History – 35%
Amounts Owed – 30%
Length of Credit History – 15%
New Credit – 10%
Types of Credit Used – 10%
Closing Zero Balance Credit Cards May Hurt Your Credit Score
Therefore, choosing to cancel a credit card may actually hurt you in two of the five categories. Under the “amounts owed category,” your credit utilization ratio is calculated by the credit reporting bureaus. The less your credit utilization, the better credit score you get in this category. Therefore, if you cancel a credit card, even if it has a zero balance, your credit utilization ratio goes up, therefore lowering your credit score in this category.
The second way it can you hurt you is that older credit gets a higher rating. Therefore, if you are closing zero balance credit cards, it may lower your score in the “Length of Credit History” category.
All in all, it only makes sense to cancel a credit card if you aren’t using the card and it’s costing you an annual fee. Otherwise, instead of closing your zero balance credit cards, you might as well keep the card open as it may actually be helping your credit score. These days, there are so many credit card offers that you may opt to use a new card rather than an old card because it offers a better rewards program. That’s logical and advisable. But the factors used in determining your credit score are each interdependent on each other and there is no single right or wrong move for manipulating this score. Just be aware that what you may think is logical when it comes to your credit score is exactly opposite of the algorithms used to calculate your score.
One thing everyone agrees on – paying your credit card bills on time is the single most important factor in raising your credit score.