Should I Let Them Cancel My Credit Card? - Simple Finance Blog

Four years ago, I took out a line of credit with a major retailer in order to take advantage of the interest-free financing option on a major purchase. Three and a half years ago, I paid off that credit card and haven?t used it since. Last week, I got a letter in the mail, informing me that the retailer was about to cancel my credit card.

The Details Of The Card

The card doesn?t have a massive credit limit ? just $5,000. I don?t have a clue what the APR is on it, because I only used it once, and when I did, it was under a deal that gave me interest-free financing. If I had to guess, I?d say it?s in the upper teens, but I don?t know for sure. I don?t pay any annual fees on this account, either.

For years, I?ve considered canceling the card myself. After all, I wasn?t using it ? I had no plans to use it ? and didn?t see the point in having it gather dust in my wallet. I?d heard that deciding to cancel a credit card could negatively impact your credit score, but since we weren?t applying for any loans or anything else that would cause someone to pull my credit report, I wasn?t too concerned about it. However, I never got around to canceling it, and had largely forgotten about it until last week?s letter.

The letter informed me that the company would cancel my credit card in 30 days, unless I made a purchase using it during the intervening billing cycle.

The Impact of Canceling a Credit Card

At this point, the idea of having a credit card canceled finally got very real to me. After all, we?re in the middle of selling our house, and when we (eventually) get around to applying for a home loan, I?m going to need my credit score to be in the best possible shape. So, I started researching exactly how a cancellation could impact my credit score.

A basic tutorial on credit scores ? they are determined by five main factors:

• Credit mix (10%) ? having a variety of types of credit (ie, a car loan, student loans, a credit card) looks better than no variety
• New credit (10%) ? recently applying for a new line of credit can temporarily drag your credit score down a few points
• Payment history (35%) ? paying off all your debts on time and in full is the single biggest factor in determining your credit score
• Length of credit history (15%) ? the longer you hold your accounts (in good standing), the better the impact on your credit score
• How much you owe (30%) ? this is the relationship between your credit limits and how much of that credit you use; the lower that ratio, the better

When it comes to my choice whether or not to cancel a credit card, I?m mostly concerned with these last two factors. Allowing the company to cancel a long-held credit card could make the length of credit history portion of my score take a hit, while closing the account would reduce my balance-to-limit, or utilization, ratio.

How Big of a Hit Am I Looking At?

This is the big question I?m looking to answer ? and, short of canceling the accounts, I won?t be able to predict exactly how many points I stand to lose on my credit score.

For one thing, I don?t hold a lot of credit cards in the first place. In fact, other than this card, I only have one other credit card in my wallet (it?s a rewards card that I use regularly). Sure, I have other types of debt ? my existing mortgage as well as the remaining balance on my student loans (almost paid off!) ? but not a lot in the credit card department. Losing the $5,000 credit limit from that card could be damning, especially since I?ll be applying for a new home loan in the (hopefully) not too distant future.

Combating The Credit Score Dip

There are ways, however, for me to close the account and keep my credit score where it is. Since I?ve always been able to pay my bills on time, I?d have a good chance of having my other remaining credit card company raise my credit limit if I were to request such an adjustment. I could also ask that company to raise my credit limit in exchange for a higher interest rate; it wouldn?t make a difference to me, since I never incur month-to-month finance charges in the first place. However, since I?m unsure exactly how big of a dip I?d face for closing the first account, I don?t know if bringing the credit limit up on my other card $5,000 would be enough to offset it.

But the bigger question is, does it even matter? My husband and I both currently have FICO scores that are not just in the good range, but in the excellent range ? above 800 (the max, by comparison, is 850). Will taking a hit of five to ten points on my credit score by allowing the retailer to cancel my credit card really hurt my chances of getting the best rates on a home loan that much? Or is it a risk that isn?t worth taking, at least, not right now?

Reader, what do you think? Should I cancel my credit card, or request to keep the account open?

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Source: http://simplefinanceblog.com/should-i-let-them-cancel-my-credit-card/

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