There are a lot of myths out there about credit cards and one of the most common is that cancelling a credit card will hurt your credit score. This simply isn’t true. In fact, there are a number of reasons why cancelling a credit card may actually be beneficial to your credit score.
First, it’s important to understand how your credit score is calculated. There are a number of factors that go into it, but one of the most important is your credit utilization ratio. This is the percentage of your available credit that you’re using at any given time. So, if you have a credit card with a $1,000 limit and you’re carrying a balance of $500, your credit utilization ratio is 50%.
Ideally, you want to keep your credit utilization ratio below 30%. So, if you cancel a credit card that you’re no longer using, it will automatically lower your credit utilization ratio and potentially improve your credit score.
Another reason why cancelling a credit card may be beneficial to your credit score is that it can help you avoid credit card debt. If you have a credit card that you’re no longer using, there’s a danger that you may start using it again and rack up a balance that you can’t afford to pay off. By cancelling the card, you’re removing the temptation and you’re less likely to find yourself in credit card debt.
Of course, there are also some potential drawbacks to cancelling a credit card. One is that it can shorten the length of your credit history. If you cancel a credit card that you’ve had for a long time, it will shorten the length of your credit history and that could have a negative impact on your credit score.
Another potential drawback is that it can increase your credit utilization ratio if you don’t have many other credit cards. So, if you cancel a credit card that has a $1,000 limit and you only have one other credit card with a $500 limit, your credit utilization ratio will increase from 50% to 66%.
Overall, there are both advantages and disadvantages to cancelling a credit card. It really depends on your individual situation. If you’re carrying a balance on the card or if you’re using it more than you should, cancelling it may be the best thing for your credit score. However, if you have a long history with the card or you don’t have many other credit cards, it may be better to keep it open.