Credit cards can be helpful in so many ways, but for various reasons, sometimes cardholders feel that they need to cancel their card (or cards, as the case may be) and go credit-free. Although this may immediately sound like a perfectly reasonable thing to do, the fact is, there is a chance that taking the action of canceling that Visa or MasterCard could lead to some unintended consequences. The main thing we want to look at here is whether canceling credit cards will have a negative affect on your FICO score (or as it’s more commonly known, credit score).
Your FICO Score
Before determining whether canceling your credit card is detrimental to your FICO score, it is important to understand what a FICO score is. This score is a calculated figure that lenders, employers, landlords and others use to determine your creditworthiness. Your score can be broken down into five key areas:
- Payment history – This comprises 35 percent of your FICO score and is considered one of the most important factors.
- Amounts owed – This comprises 30 percent of your FICO score. Simply having money owed on credit accounts does not necessarily make for a high-risk borrower, and correspondingly, does not necessarily lead to having a lower FICO score.
- Length of credit history – This comprises 15 percent of your score, and it takes into account your overall credit lifespan, how long your credit accounts have been established, and how long it has been since you used certain accounts.
- Types of credit in use – This comprises 10 percent of your FICO score. It can be made up of such items as credit cards, retail accounts, mortgage loans and any other installment loans.
- New credit – This comprises 10 percent of your FICO score and takes into account new credit accounts. High credit activity in short time spans can have a negative impact on lender consideration, particularly for people who have a young credit history.
The Myth Vs. the Truth
Simply having credit cards is neither good nor bad. Based on the FICO score breakdown, the largest consideration is not necessarily the age of your credit cards or the number of cards that you have, but rather your payment history. This will have a tremendous impact on your score. The amounts that you owe will also play an important factor in the determination of your FICO score and should be considered.
Canceling credit cards will not adversely affect your score much. It will impact your credit score but the potential result is negligible, and therefore it is not worth paying annual fees or dues simply to maintain an open line of credit. Maintaining a card that has no activity is essentially pointless.
Course of Action
Simply holding on to your department store credit card or zero-balance cards for your FICO score is unnecessary. In today’s digital climate and with identity theft being so prominent, it would be advisable to cancel and shred any useless lingering credit cards or accounts. Since card cancellation has virtually no impact on your FICO score, it would make sense to start closing doors and shoring up financial defenses.
Take care to dispose of your cards properly. Shred your cards and any documentation you don’t need in the short or long term. Be sure to save any documentation you may need for taxes or for any other legal consideration. Thoroughly disposing of the unnecessary documents and your unused credit cards will help foster a secure personal financial environment.