Canceling Credit Cards
By: Larry Goldberg
If you have a credit card with a high interest rate, and you receive an opportunity to accept another credit card offer with a lower interest rate, read the fine print, and if all reads well, take it! You can then cancel your credit card with the higher interest rate, but there are a few things to take into consideration.
Credit card APR (annual percentage rate) is so important because it means the difference between paying more or less in interest over the life of your loan. Credit card APR can vary widely from company to company, and ultimately will depend on your credit score. When you receive an offer for a credit card with a lower credit card APR than what you currently have, make sure you check the details. Read all the information attached to the offer because, many times, a lower credit card APR is only issued for a certain period of time.
You can cancel your credit cards that have a higher credit card APR, but know the pros and cons of doing so. If you are canceling credit cards because you think it will improve your overall credit score, you might want to give that idea more thought. Although it sounds reasonable, in actual fact, it does not work that way. Whether you have 10 or 20 open lines of credit available to you, banks do not look at that particular factor in the way you might think. Lenders look at your credit report and compare your available credit with the amount of debt you owe to get a ratio. That ratio actually ends up being skewed, or inaccurate, if you cancel several lines of credit because it takes away the amount of credit available to you. The credit available to debt ratio would then lower, presenting a worse appearance of your financial situation. It can actually be good to keep a few lines of credit open, especially if they have zero balances on the accounts. Fair Isaac & Co., known as FICO, suggests no more than seven lines of available credit. After the seventh avenue of credit available to you that remains open in your credit report, your credit score can begin to suffer.
Also, your credit report score benefits from a long successful history of use. Closing credit card lines of available credit, just to close them, as long as there is nothing negative about that particular line of credit, is not going to benefit you. It can be helpful to keep them open because it increases the available credit to debt ratio that lenders often look at.