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Why Cutting up your Credit Cards may not be the Right Move

Credit Repair

Many consumers, worried about an overabundance of credit card debt and rising interest rates, have chosen to take matters into their own hands and cut up their credit cards, once and for all.

But is this really the best decision, both for yourself and your credit score?

The first thing you need to know is that your ability to borrow virtually any kind of money is dependent upon a strong credit score, especially in today’s economy. It is because of this that cutting up your credit cards, although a seemingly smart idea, may really be detrimental to your credit score.

For example, cutting up your credit cards and canceling your accounts immediately affects your FICO score, as your available credit is now much lower. Because part of your FICO score is related to your available credit, canceling your accounts may do much more harm than good.

Consider All of your Options

Instead of cutting up your credit cards and closing your accounts, consider paying down the balances. This is simply the easiest way to protect your credit score and keep your debt manageable.

Your timely payments will allow you to establish a good credit history which will, in turn, improve your credit score. In addition, your low credit card balances will keep your available credit open, which will therefore produce a stronger credit score.

The Basics of a Good Credit Score

A good rule of thumb is to seek consumer credit counseling services if you are drowning in debt; otherwise, it is best to manage your debt by making timely payments and by keeping your credit card balances to a minimum.

It is also a good idea to regularly check your credit score. Order a copy of your credit report from all three credit reporting agencies at least on a yearly basis to make sure that your report is accurate and free of any errors or discrepancies.

Canceling Your Credit Card – When and Why

Introduction

You have probably heard that canceling a credit card may not be a smart financial decision, as it may affect your credit score. And this is true – to some extent.

The three, national credit reporting agencies use your income-to-debt ratio when calculating your credit score, so the more available credit you have (i.e. available credit on your credit cards) the higher your credit score. Therefore, it only makes sense that canceling a credit card lowers your available credit and ultimately your debt-to-income ratio.

There are exceptions to every rule, however, and canceling a credit card has its own set of exceptions.

When to Consider Canceling a Credit Card:

• If you are in the midst of a divorce and your soon-to-be ex-husband or wife has access to the account - Remember that, as long as you are married (particularly for states with community property laws) you are responsible for half of the bills. So, unless you want your soon-to-be-ex charging up your credit card it is best to simply cancel it and avoid a potentially disastrous situation.
• If you simply can’t stop spending – If a credit card is just too much temptation and you continue to rack up credit card debt that you cannot realistically pay off, then you may want to consider canceling the credit card account. Because, after all, credit card debt that cannot be repaid will more negatively impact your credit score than a closed account.
• If the number of credit cards in your wallet is too much to manage – Consumers need only realistically to have one or two, low-interest credit cards. If you find yourself with a wad of credit cards, then you may want to consider canceling the cards that you no longer need.
• If the creditor’s terms and conditions are unsatisfactory – If your credit card company adopted a new set of terms or conditions that are unsatisfactory to you, such as interest rate hikes, then it may be best to cancel the card so that you don’t accidentally charge on it. It will also send a message to the credit card company that, because of their terms and conditions, they lost a good customer.