Some people are convinced that cancelling credit cards helps improve credit ratings, but this move sometimes has exactly the opposite effect. If a card has been stolen, or lost, cancelling the card is advisable to prevent its misuse. However, it is only recommended to include closing credit cards in your personal financial recovery program in specific circumstances. For example, owners of multiple credit cards can gain if they can manage with fewer cards.
1. Closing Credit Cards Won’t Improve a Credit Score
Many people are concerned to have a good credit score and so they are tempted to find shortcuts to bettering their score. Unfortunately closing a credit card is never going to contribute to a better credit score. To know why this is the case requires understanding a little about how credit scores are calculated. An important factor in this calculation is credit utilization – the percentage of available credit used up. The more available credit remaining unused, the better that individual’s credit score. It therefore follows that closing credit cards reduces available credit and this can lead to a lower (worse) credit score. Ideally credit utilization should be kept under 30%.