The following post is from Melissa Batai
How many credit cards do you have? The average American “holds 3.1 cards, with an average balance of $6,354 across all cards” (CNBC). Many people like to have a variety of cards so that they can use them for various rewards and cash back. Others like to have them because they’re self-employed and like to have one card for business and the rest for personal use.
However, if you’re in debt or if you’ve just gotten out of debt, you may think it’s best to simply cut up your cards and close your credit line. After all, if you do that, you can’t go in debt again.
While this reasoning is true, there are also significant negative repercussions to closing your credit line, namely that your credit score will take a major hit. If you plan to take out an auto loan to buy a car or have a mortgage to buy a house, or even if you just plan to rent an apartment anytime soon, a lower credit score can impact your ability to do that.
How Closing Your Credit Card Lines Affects Your Credit
There are several reasons why closing a credit card line may negatively impact your overall credit score.
The amount you owe accounts for 30% of your overall credit score. Particularly, lenders are looking at your debt-to-credit ratio. If you have $20,000 in available credit over all your credit cards, and you have $16,000 in debt on the cards, your debt-to-credit ratio is 80%, which is high. Lenders like to see you maintain a debt-to-credit ratio of no more than 30%, meaning if you have $20,000 in available credit, you should have no more than $6,000 in debt.
If you still have balances on your cards and you close one or two accounts, you’ll be lowering the amount of available credit you have, thereby increasing your debt-to-credit ratio, which can negatively affect your credit score. You’ll feel the impact less if you don’t carry any balances.
Length of Credit
How long you’ve had established credit accounts for 15% of your credit score. If you’ve had one credit card for 15 years, another for 10 years, and one more for 5 years and you close your two oldest accounts, your credit history may look as if it’s only 5 years long, which will negatively affect your credit score. Ideally, try not to close the accounts that you’ve had open longest.
Alternatives to Closing Your Credit Card Lines
If you are worried that you’ll use the cards irresponsibly if you don’t close your line of credit, there are alternatives you can take that will make the credit card more inaccessible but let you still benefit from having the credit line open.
Cut Up the Cards
One common strategy is to simply cut up your credit cards. Your credit lines will still be open, but you won’t be able to charge items anymore.
Put The Cards in Peanut Butter
If you’d still like access to the cards for emergencies, consider putting them in peanut butter. Sure, you waste a $2 jar of peanut butter, but the cards are still available if you need them. I like this strategy because you likely won’t be reaching into that jar of peanut butter and pulling out your card and cleaning it of peanut butter unless you really need to.
Put The Cards on Ice
The less intrusive way to limit your use of credit cards is to put them in ice. Literally freeze them surrounded by water. You’ll be able to use the cards if you thaw the ice, but just having them in the freezer may make you think twice about using them.
Ideally, you’ll leave your lines of credit open to maintain your current credit score, but if you’re worried that you’ll abuse them or if you have to pay a pricey annual fee, you may consider closing them. Just make sure you have less than a 30% debt-to-credit ratio and that you’re not closing the card that you’ve had the longest.
My Question for You
How many credit cards do you currently have? If you closed some of your credit cards, did your credit score take a hit?