We have all been there, some of us are there now; some of us have already done it. We want to cancel a credit card after we pay it off. This more often than not is the result of us not wanting to spend a yearly fee that comes with the credit card. Or maybe we just don’t want the card anymore because of the high finance fees. While this is all fine and good, there is ONE major risk that comes with cancelling a credit card.
Most of us think of our credit scores backwards. We think that paying off debt and cancelling a credit card or two… or more, is a good thing. Many people envision the whole situation backwards, as this is not the case at all. You need to think of your credit score in terms of your outstanding debt compared to the total limit of all your credit cards.
As funny as this sounds, just because someone has thousands of dollars in credit card debt doesn’t necessarily mean they have bad credit, quite opposite actually, depending on the amount of money an individual makes. Obviously if you make $25,000 a year and you have that much credit debt you are not going to have a very good credit score.
What is the Big Risk?
So what is the major risk involved with cancelling a credit card? Your FICO Score can take a bing. You want to cancel a card because it is paid off and you don’t want to worry about it. The problem is, you lose all that credit once the card is cancelled. It doesn’t reflect the way you think it would. If you cancel a card that has a $10,000 credit limit, then when FICO checks your score, they see that you have $10,000 less in credit than you previously had, resulting in a lower credit score.
What Are Your Options?
Fear not, as with any negative situation there is usually an alternative. The alternative here is this; you can still cancel a card and be given credit for the value of the card for several years. It usually takes several years before the history is scrubbed from your credit report (good or bad), which gives you plenty of time to still get the credit for the card within your credit score.
The best thing to do though is to cancel a credit card during a time when you don’t think anyone will be accessing your FICO score. If you don’t need a loan or need credit for the foreseeable future, then go right ahead and cancel it.
Remember, cancelling a credit card may reflect differently on your credit score than you imagine. Take the proper steps and precautions to avoid losing any positive FICO credit score when you do choose to cancel a credit card.