Nearly everybody on this planet knows that Dave Ramsey is against credit cards; so much so that he shuns the idea of utilizing cards for their rewards and encourages people to CANCEL all of their cards despite the fact that canceling it may hurt your credit.
So, being a Dave Ramsey-trained counselor and coaching people over the last few years, a question I commonly get asked is: does canceling a credit card hurt your credit?
While there are variables that may change the answer, a majority of the time canceling a credit card will hurt your credit.
1. It affects your credit history.
A large part of your FICO score involves the length of your credit history: basically how long you’ve had credit cards, mortgages, and other loans open.
If you are thinking about canceling a credit card it would be wise to cancel one that you’ve recently opened. If you cancel an older credit card then it will likely hurt your credit.
2. It may affect debt-to-credit ratio
The other primary way that canceling a credit card will hurt your credit, is that it will change your debt-to-credit ratio.
For those that don’t understand this, let’s assume you have 3 credit cards with a total available credit limit of $10,000. If two of those cards have balances of $6,000 (one is paid off), then your debt-to-credit ratio is 60% or $6,000/$10,000.
Now, if you were to cancel the credit card that had a $0 balance and keep the other two cards open, it would change that ratio (for the worse) and hurt your credit. For this example’s sake, let’s say the card you were going to cancel had a $2,000 credit limit. Once you cancel the credit card your debt-to-credit ratio would then be 75% with $6,000 of debt to $8,000 in available credit.
While nobody knows the exact percentages, part of your FICO score does include the debt-to-credit ratio and having anything above a 25-30% is said to hurt your credit.
So, should you cancel your credit card anyway?
If you’re part of the Dave Ramsey cult and truly believe that your credit score doesn’t matter, then sure…you might as well cancel it.
However, if you’re looking to obtain a high credit score and build your credit so that you may get a mortgage down the road, refinance your house, or get better rates on your utility, cell phone, and insurance bills, then NO! You should not cancel a credit card because it will likely hurt your credit.
Saying all of that, if you’re one of the credit card holders that are working the system and pay your balance off every single month, then canceling a credit card may not not hurt your credit. Caveat: as long as you cancel the card with the least amount of credit history. The reason your credit score would remain unaffected in this scenario is because you already have a debt-to-credit ratio of 0%. So lessening your available credit would not change that ratio.
If you’re ignorant about your credit score and haven’t looked at your credit report in years, then take a few minutes and take advantage of a few resources that will help you obtain a free credit score and report.
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