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Canceling credit cards - help or hurt your credit score?

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Credit cards offer many advantages, including providing a measure of insurance when making purchases and enabling an individual to develop a healthy credit score through prompt payment of balances. According to a 2016 Gallup report, about three out of four adults in the United States have at least one credit card — many people have two or three.
While there is no magic figure for how many credit cards is the “right” number to have, those shiny plastic cards can have a significant impact on consumers’ financial well-being. People looking to reign in spending or consolidate may make the decision to close cards, but not without wondering if closing accounts is beneficial or detrimental to their financial reputations.
There is a common belief that closing a credit card account will always negatively impact one’s credit rating. But that isn’t always the case. Getting the facts about when it can be advantageous to close accounts or keep them open can help consumers maintain strong financial reputations.
• Utilization ratio
Closing credit cards can affect the percentage of consumers’ available credit, which may affect their credit ratings. Closing a particularly high-limit card will increase the percentage of used available credit when spread out across the remaining cards, also known as the utilization ratio. A higher percentage of used available credit can negatively affect credit scores. Consumers who currently carry high credit card balances may be smart to keep existing lines of credit open or request increases on the credit limits of accounts they intend to keep before closing some current accounts.
• Annual fees
It can be wise to close credit cards with high annual fees if the benefits of the cards are no longer proportionate to the amount spent on the fees. If cards are being held only for perks, it may be possible to find a different card that does not charge an annual fee.
• Age of credit history
If a consumer must close a credit card account, he or she should avoid closing the oldest one. The longer an account has been open, the better it is for a credit score because it establishes a long credit history. According to the credit scoring company FICO, the length of consumers’ credit histories account for 15 percent of their credit scores.
• Fraud or theft
In the event a card is stolen or used fraudulently, consumers may opt to close the account so no other purchases can be made. However, creditors also work around this by keeping accounts open and simply issuing a new card number.
If the decision is made to close a credit card...
...Do not do so while there is an available balance; all balances should be paid off before an account is closed.
It’s also unwise to close a credit card simply to remove poor payment history from one’s record. Under the Fair Credit Reporting Act, negative data such as late payments remain on a report for up to seven years after the account is closed.
Closing a credit card account has its advantages and disadvantages. Consumers should investigate the risks before closing a given account.
Simple ways to quickly boost credit scores
Consumers who demonstrate an ability to pay bills on time and stay out of debt can make themselves more attractive to prospective creditors, which can ultimately save them thousands of dollars when they purchase homes and/or vehicles.
While strong credit scores take years to build, men and women looking to improve their scores can begin doing so rather quickly. Scores will not skyrocket overnight, but they will begin to improve if consumers begin taking the following steps.
• Pay bills on time
Paying bills on time is one of the most effective and simplest ways for consumers to improve their credit scores. One of the credit scores lenders use to determine if they will extend credit to a given applicant is the FICO® score, which is generated by the Fair Isaac Corporation. According to the Fair Isaac Corp., a FICO score is broken down into five categories, some of which factor more heavily than others. An individual’s payment history accounts for 35 percent of his or her FICO score, making it the most influential of the five factors for people who have been using credit for a long time. (Note: People with a nonexistent or greatly limited credit history may have their FICO scores more influenced by other factors.) If necessary, set up automatic payments so all bills, but especially bills owed to creditors, such as credit card companies and student loan lenders, are paid on time.
• Pay down balances and keep them low
Paying bills on time might not be enough to dramatically improve credit scores if consumers are still only paying the minimum amount each month while maintaining high balances. After payment history, amounts owed is the second biggest influence of most consumers’ FICO scores, accounting for 30 percent of an individual’s score. So in addition to paying on time, consumers should try to pay more than the minimum amount due each month, ideally paying balances in full each month.
• Study your credit report
Credit scores can sometimes fall victim to errors on a person’s credit report. A 2012 Federal Trade Commission Study found that roughly 25 percent of all consumers had errors on their credit reports that adversely affected their credit scores. Consumers who suspect their credit score does not reflect their credit worthiness should examine their reports, which are available to all consumers once a year for free, for mistakes. Report any mistakes to Equifax, Experian and/or TransUnion.
• Wait to apply for new lines of credit or mortgages
Consumers’ credit scores take a small hit each time they apply for new lines of credit, whether it’s a credit card or mortgage. Consumers who want to quickly improve their scores should refrain from applying for new lines of credit until they have increased their scores to a point where they won’t mind seeing those scores take a small dip.
Consumers’ credit scores can affect their lives in various ways. While it takes time to build strong credit histories, consumers can take small steps to begin improving their credit scores right away.