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Credit Cards: Use Them or Lose Them?

credit cards - use them or lose themIt’s a pretty common practice. The application comes in the mail or online, the rewards are enticing, and before you turn around, you’ve signed up for another credit card. With your wallet getting a little crowded though, the inevitable question comes up ‘Should I cancel my credit card?’

With multiple cards occupying space in your pocket and on your credit history, not all of which you use regularly, cancelling a credit card or two would seem like an obvious choice. But, it’s not that simple. There are some important factors that should be taken into consideration:

  • Does cancelling a credit card hurt your credit score?
  • How many credit cards should you have at one time anyway?
  • What are the ramifications of cancelling a card?

So, does it actually hurt to cancel credit cards? Affect credit score, yes; hurt credit score, not necessarily. Below, we’ve addressed the pros and cons of getting rid of cards that are used infrequently so you can decide if it’s the best choice for you.

Pros of Cancelling the Card

There are several benefits to unloading cards that are just collecting dust:

  • It’s one less card/monthly bill to keep track of (this may or may not include annual fees and interest rates that you’ll be glad to eliminate/minimize)
  • Closing a credit card and then reopening it later on might re-qualify you for the generous benefits companies reserve for new cardholders. Before cancelling, though, check the card issuer’s policy, as some require a minimum waiting period between cancellation and reopening in order to receive the welcome bonus, or don’t allow this leeway at all.
  • Not all credit cards are created equal, and getting rid of a card with underwhelming benefits/perks allows you to concentrate spending on the cards that give you the best rewards, including points deals, cash back, air miles, lower interest rates, and more.

Cons of Cancelling the Card

On the other hand, cancelling a card may not be your best option because:

  • Closing a credit card can increase your overall credit utilization across your other cards, and therefore hurt your credit score. Let’s explain. Say you have five different credit cards, each with a spending limit of $5,000. That’s $25,000 worth of credit you have on hand. If you have $5,000 worth of credit card expenses, then you are using 20% of your overall available credit. If you cancel three of these cards, then you lower your overall credit limit to $10,000, but your $5,000 debt stays the same. That means now you are using 50% of your overall available credit, which is well over the 30% utilization limit recommended for maintaining a good credit score.
  • Generally, lenders prefer borrowers that have long credit histories, so owning a card for several years actually looks good on your history. Alternatively, closing the oldest card you have will shorten your credit history and can negatively impact your chances of getting an important loan in the future.
  • If you close a credit card, you forfeit any chance of building up your credit score with that card. Conversely, keeping a card open, making even a single monthly charge with it, and paying it off month by month will actually build your credit score up over time.
  • You may be tempted to close a card before you’ve paid off the balance, to try to prevent future spending. What you don’t realize is that in the eyes of credit bureaus, this looks as if you’ve maxed out the credit limit on that card and are trying to get out of a bad financial situation. Obviously, this scenario is not good for your credit score.

Bottom Line

At the end of the day, Canadians with high credit scores, a long history of timely credit payments, and diverse credit types might benefit from swapping out non-beneficial credit cards for more generous ones.

Alternatively, those who are trying to build up credit should perhaps think twice before cancelling their cards. It might generally be a wise practice to routinely clean out clutter in our lives, but that’s not necessarily the case if you’re trying to lay the groundwork for a bright financial future.

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