Today’s “Ask the Reader” question comes from Sherry. She writes:
How does one go about canceling unwanted credit cards? You know, those credit cards you get so you can get a 10% discount on your 1st purchase…I think I have a 2″ stack of unwanted, unused credit cards.
We recently refinanced our house and superior credit (no reason to worry about our credit) and no debt…so how do I get rid of these cards?
Sherry, closing credit cards can be a little bit tricky in that it does affect your credit score, but probably not enough to be greatly concerned. Your FICO score is calculated by a number of factors, and two of them related to your question are credit utilization ratios, and the average age of your credit history.
Your credit utilization takes into account the amount of debt you have outstanding against your total credit limits. For instance, if you owed $3,000 on a $10,000 credit card, your credit utilization would be 30%. It is generally accepted that you should aim to keep your utilization ratio below 30% to improve your scores. By closing accounts you are eliminating the $10,000 credit line from that formula, and instantly increasing your credit utilization.
In your case, it’s a moot point. You are debt free. Having a number of open trade lines may actually be detrimental in your case as lenders may see the cards as an opportunity to accumulate future debt. Another risk is the more open accounts you have floating around, the higher the chances of falling victim to identify theft.
The length of time your credit accounts have been on file also affects your credit score. Closing accounts you have had in place for several years effectively lowers the average age of your credit history, and may negative affect your score. I wouldn’t let this deter you from closing out the unwanted credit cards, because the effects on your credit will be minimal. I suspect you’ve accumulated the cards over a number of months or years, so closing them all will likely have little net effect on credit scores.
As for the mechanics of closing out these cards, the best way to do it is in writing. I typically call customer service and advise that I would like to close the account. Some places will try to negotiate, or talk to you like you’re an idiot for not wanting their card. Stay cool – be adamant that you would like the account closed, and then follow up with the same request via letter to make sure it is in fact closed.
In order to keep your credit cards to a minimum you should only apply to the best credit card offers. Some of the bigger banks offer some pretty good rewards cards that you might want to have for your daily purchases. However, if you’re looking at savings accounts, then an internet bank is usually your best bet to find good savings account rates for your cash.
Do you have any tips to add for Sherry?