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Will cancelling a credit card hurt your credit score?

The short answer is "it can." But understanding why is the important part.

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Will cancelling a credit card hurt your credit score?

Will canceling a credit card hurt my credit score? It can. Closing a credit card once you pay it off isn’t always the right choice. Okay, here’s why. Your credit history is made up of a bunch of different factors, one of which is how much of your available credit you’re using.

Let’s imagine you have three different credit cards, each with a $1,000 credit limit, so your total available credit on these three cards is $3,000. You currently have one card maxed out. So you owe $1,000 on your first card, $500 on your second, and your third card has a zero balance. In this scenario, you’re using $1,500 of the $3,000 you have available for credit, about 50%. Now, let’s say you picked up an extra shift at work and paid back $250 on your first card and the whole balance of $500 on the second. Nice work, by the way. Since two of your cards have no balance now, you close both of them. Your credit probably looks better to lenders now that you only owe $750 and you have less available credit, right? Not necessarily, because you now only have $1,000 in available credit. Remember, you closed two of your cards, which means the percent you’re actually using goes up, even though you owe less. On your credit report, it looks like this: you now are using $750 of the total $1,000 you have available. So now you’re using 75% of your credit. And that’s enough to have a major impact on how lenders view you. In this scenario, if you can avoid temptation and use them wisely, it might be better to keep those two card accounts open with no balance, improving your credit utilization ratio. Because remember – a few cards can be good to have. But if you have too many, it can end up working against you.

Remember, the best thing you can do for your credit score is to make on-time payments and, whenever you can, pay more than the monthly minimum payment. In addition to saving on interest, it improves that credit utilization ratio, which helps your credit score.

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