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4 times it's not safe to cancel a credit card

Rachel Hartman

October 24, 2013

If a credit card you signed up for in the past has now lost its luster, canceling the account might seem like a reasonable next step.

And in some cases, it could be a smart move — but it could also lead to consequences you'd rather avoid, such as a lower credit score.

“Timing is everything when it comes to canceling a credit card,” says Jeanne Kelly, credit coach and author of “The 90-Day Credit Challenge.”

Here, experts relate times when it's not safe to cancel a credit card. Read on to learn when you'll want to wait, and when you can cancel without worry.

1. You're carrying a lot of debt on other cards.

“Any time you close a credit card down it will take away any available credit you have on that card,” says Katie Moore, a financial counselor at Greenpath Debt Solutions, a nationwide nonprofit financial organization that assists consumers with credit card debt, housing debt and bankruptcy concerns.

Part of your credit score is made up of the percentage of available credit you're using (also known as credit utilization). To find out what your total available credit is, add together the credit lines of all your cards. Then, add together the balances on those cards — that number is the total amount of credit used. If you close an account, the percentage of overall credit you're using will likely increase. This can cause your credit score to drop, as it's a red flag to lenders that you're overextended with credit card debt.

Rather than closing the account, consider keeping it open and not using the card, suggests Kimberly Foss, CFP, CPWA, founder and president of Empyrion Wealth Management in Roseville, Calif. If you're afraid you'll rack up debt with it, cut up the card or put in a bowl of water in the freezer, Foss suggests.

It's safe to cancel when: You have enough cards and are carrying no — or very little — debt. If you have plenty of credit cards and don't have any balances (or have very low balances), closing down an account will probably not have a big impact on your score, Moore says. Ideally, you should keep the amount you owe across all your cards under 30 percent of your total credit limit. If that healthy ratio is preserved after you cancel a card, you're in the clear.

2. You're about to apply for a major loan.

If you're getting ready to take out a mortgage or car loan, be careful — canceling cards could alter your credit score at a time when you want it to go up or stay put.

Your credit utilization plays a role here.

“It changes your debt ratio of what is available to you,” explains Kelly. In other words, if you have balances on other credit cards, and close an account, you'll have less overall credit available compared to what you owe. That change can cause your credit score to drop.

A lower credit score could have a substantial impact on what you pay during the lifetime of the loan. Say your score is 760 before making any changes. When you cancel a credit card, it drops to the 750s.

MyFICO.com offers a calculator that shows the cost of a lower score. Perhaps you're getting a 30-year fixed mortgage of $300,000. With a FICO score of 760, your monthly payment might be $1,416. For a score of 757, your monthly payment could increase to $1,455. Over the lifetime of the loan, you might pay an extra $13,839.

“In general, don't do anything during the loan process,” advises Todd Huettner, president of Huettner Capital, a residential and commercial real estate mortgage brokerage in Denver, Colo. In addition to closing accounts, this includes opening new cards, he says. If you apply for a card, the credit card company will likely ask to review your credit. This action, called a “hard pull,” can also lead to a dip in your score because it could make you seem desperate for credit.The best thing to do with credit cards before applying for a big loan is to pay the balances off.

It's safe to cancel when: You've finished the loan process completely. In other words, your mortgage has closed, or you're holding the car keys in your hand.

3. It's your only credit card, and you don't have other loans or cards in your credit history.

If you own just one credit card and have never taken out an installment loan, such as a car loan or student loan, you're probably better off hanging on to the plastic.

That's because lenders are very interested in seeing how you manage credit accounts. In fact, your credit payment history determines 35 percent of your FICO score. If you don't have fresh, frequent evidence of your ability to make payments, your credit score will falter.

What's more, canceling your only card could prevent you from having a FICO score at all. If you cancel the card, its history (positive or negative) will remain on your credit report for a while (10 years if the payment record was flawless, seven if it was imperfect). However, to generate a FICO score, there needs to have been some sign of credit life — such as the use of a credit account or a loan payment — within the past six months. Once you close your only card, there will be no payments to make, meaning FICO may not be able to assign you a score.

If a lender relies on FICO (as many lenders do) to make decisions, that can make it difficult for you to get credit.

“Lenders might ask, 'Was this person ever even extended credit?'” notes Lauren Rode, bankruptcy attorney at Consumer Action Law Group in Los Angeles.

For consumers with just one credit card, “it's good to use it occasionally and then pay it off,” advises Rode. This shows other lenders you are indeed able to manage credit, and have a history of making on-time payments.

It's safe to cancel when: You have taken out other loans or credit cards and made payments on them. Then, if you close one account but have others open, the impact on your score may not be as great.

“There's not as much risk because you're using credit responsibly with others,” explains Rode.

4. You've had the card much longer than your other credit cards.

“Closing older accounts — even those that are carrying higher interest rates — may be a mistake, since part of your score is derived from the length of your credit history,” notes Chris Viale, president and CEO of Cambridge Credit Counseling, a nonprofit credit and housing counseling agency based in Agawam, Mass.

Your length of credit history, including how long specific credit accounts have been established, makes up 15 percent of your FICO score. (See how FICO breaks down your score here). Say you have five credit cards. You opened one of those accounts 10 years ago. The other four, however, were opened within the past two years. If you cancel the card you've had for 10 years, it will eventually fall off your credit report — and at that point, your credit history will be reduced by eight years.

If your oldest account doesn't come with super inconvenient strings attached (such as an annual fee), consider holding on to the card and using it occasionally. If you pay it off on time each month, even if the card has a high APR, it won't hurt you.

“Make a plan to pay down your balances on older, high-interest accounts, but keep them open and performing,” suggests Viale. The next time you make a purchase, pull out one of your newer cards with a lower interest rate.

It's safe to cancel when: You've established a long, healthy credit history. If you own other credit cards you've held for many years, closing one account should not have as great of an impact.