If you’re struggling to find the self-discipline you need to avoid running up high credit card bills, you may be tempted to call the card issuer and cancel your credit card altogether. Even though this impulse arises from your desire to make a fresh financial start, it’s usually not the wisest idea. Here’s why.
A major portion of your credit score is based on your credit utilization ratio. This number shows how much of your available credit you are using at any given time. For example, let’s say you have two credit cards, and each one has a credit limit of $10,000. Your available credit is $20,000. Let’s say one card has a zero balance, and you owe $6,000 on the other card. Your credit utilization ration is 30 percent because $6,000 is 30 percent of $20,000. If you cancel the card with a zero balance, your available credit drops to $10,000 and your credit utilization ratio suddenly becomes 60 percent (because $6,000 is 60 percent of $10,000). Having a higher credit utilization ratio makes you look like a poorer credit risk and lowers your score.
Another potential problem with canceling a credit card is that it may lower the age of your credit accounts. Older cards are valuable because they are a sign of financial stability.
It’s important to remember that credit cards shouldn’t be left entirely unused with a zero balance because the card issuer may simply close an inactive account. Even if you freeze or cut up your physical card, you should retain a record of its information so you can use it for a small purchase from time to time. If you are having problems with a low credit score, you can also check out one of the best credit card companies to get some help fixing your credit score.
Impulsive measures such as canceling credit cards won’t change your behavior in the long run. Developing a healthy approach to your personal finances is a holistic process that involves establishing and living within a realistic budget.
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