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“My fiancé and I plan to get married as soon as this pandemic ends. Luckily, we both still have jobs, although I’ve been furloughed one week out of the month. We’re trying to pare down our financial lives to the bare necessities, so I want to get rid of at least some of our credit cards.
I have a Visa and Discover Card I’ve had forever, and four store cards that I only got because there was an initial discount. My fiancé has nine cards, and he’s always trying to use the ones that give him the most rewards. Unfortunately, he has so many he sometimes forgets to pay one, and between the late fees and the annual fees he’s paying, I’m not sure he’s really earning anything.
He doesn’t want to close any of our cards because he says it will destroy our credit score. I’d rather our score drop than keep cards we can’t keep track of in a bad economy. I don’t want to argue about this, so what do you think? Should we close some of our cards and if so, which ones are the best to close?”
– Victoria in Texas
Laura Adams, author, and host of the Money Girl podcast responds…
Having credit cards and using them responsibly is one of the best ways to build excellent credit. High credit scores help your financial life in a variety of ways, including:
- Qualifying for loans on a home, car, education, or other personal needs at competitive interest rates.
- Getting the lowest credit card interest rates and best promotional offers.
- Reducing your insurance premiums (in most states) for auto, home, and life policies.
- Getting approved to rent an apartment or home.
- Cutting your security deposits on different types of utilities.
- Increasing your chances of getting a job.
Once you have credit cards, it’s critical to know when or if you should cancel them. They’re financial tools that come with pros and cons you must weigh carefully.
Deciding to keep or cancel
The main advantage of keeping credit cards open is that you’ll have the highest available credit. That could be a lifesaver if you experience financial hardship and run out of income or savings. But another reason to hold on to available credit is that it’s a part of your credit utilization ratio, which is one of the most significant factors in how credit scores get calculated.
Credit utilization gets calculated by dividing your total account balances by your total credit limits. For example, if you have a credit card with a balance of $1,000 and a credit limit of $2,000, your utilization ratio is 50% ($1,000 / $2,000 = 0.50).
Your ratio is calculated per credit card and as a total of all your cards. Therefore, keeping a card open, even when your balance is zero, boosts your credit scores. The more available credit you have in your name, the better it is for your credit scores.
The ideal utilization ratio is 20% or lower because it shows that you’re using credit responsibly. Again, this should be your target per card and as an aggregate of all your cards.
The problem with canceling credit cards is that your available credit plunges, which causes your utilization ratio to skyrocket and your credit scores to drop. Whether taking a hit to your credit is worthwhile depends on your financial goals.
Good reasons to cancel a card
Here are some situations when canceling a credit card may be beneficial:
- It costs you more in fees than you’re getting in rewards.
- It tempts you to overspend.
- It was opened recently or by mistake.
However, if you’re planning to finance a big purchase–such as a home or car–within the next six to 12 months, I don’t recommend closing any credit accounts. Your goal should be to maintain or improve your credit ahead of a big loan application and not jeopardize it.
How to cancel a credit card to minimize potential damage
If you decide to simplify your life by closing one or more credit cards, use the following tips:
- Cancel cards slowly over time, such as no more than one card every six months.
- Cancel cards with the lowest credit limits first, so they impact your utilization ratio the least.
- Cancel cards that you’ve owned the least amount of time first.
To learn more, read When to Cancel a Credit Card? 10 Do’s and Don’ts to Follow.
I don’t recommend keeping cards that you’re not using responsibly. Closing them and taking a hit to your credit might prevent more significant financial problems. You’re the only one who can weigh the pros and cons of having cards.
When you and a spouse or partner can’t agree on keeping or closing credit cards, you might make a comprise. For instance, you could pay off a card to avoid potential late fees but keep it active to maintain the available credit. Or you could close one card per year using the tips above, so it has as little impact on your credit scores as possible.
If you’re having trouble juggling credit card payments, we can help. Talk to a debt relief specialist to understand options for relief.
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