The Surprising Downside of Cutting Up Your Credit Cards

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Cutting up your credit cards
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It's a time-honored tradition for shopaholics: When you realize your spending has spiraled out of control, you take out your scissors and cut up the credit cards that have been getting you in trouble.

If you're getting out the scissors to destroy your plastic, presumably you're also picking up the phone to cancel the account itself. But is that such a good idea?

If the goal is to rein in your spending, there are good reasons to kill some accounts altogether. The prevalence of e-commerce has made it easy to buy nearly anything without a physical card, so if you've got your credit card info stored in your Amazon account, just cutting up the card won't do much. And leaving the account open means that you could, in a moment of weakness, ask your bank to send a new card.

In that case, simply cutting up your cards is a meaningless gesture unless you're also closing the account. But there's a good counterargument: Closing accounts could hurt your credit score.

"Generally the advice is that you not close accounts, especially if you're planning to apply for credit in the near future," says Rod Griffin, director of public education for Experian. "The reason is utilization, which is the second-most important factor in credit scoring."

Utilization is a simple calculation: It's the ratio of your total credit card balances to your total credit limit. The higher the utilization -- the more of your total available credit you're using -- the worse the impact on your credit score.

For example, say you have two credit cards, each with a $10,000 limit, and a total of $8,000 in debt between the two cards. Your utilization ratio is 8,000/20,000, or 40 percent. If you do a balance transfer to put all the debt on one of the cards and cancel the other account, you shrink the denominator of that fraction to 10,000. Now your utilization ratio is 8,000/10,000, or 80 percent. You owe exactly the same amount as you did before, but ratings agencies see you as riskier, and ding you accordingly.

So if by closing some accounts, you're simply shifting most of your spending and debt onto other cards, you're hurting your credit score to little benefit. On the other hand, if you're also reducing your debt and credit card spending as you close your accounts, the impact on your score will be minimal.

Another thing to consider before closing your account is the age of the account. While not as important as utilization, the length of your credit history also factors into your score, so it's best to shut down "younger" accounts rather than the credit card you've had since college. (With that said, closing an old account won't wipe out the good credit you've built up from years of paying bills on time.)

In any case, Griffin says that you shouldn't let credit-score concerns totally dictate your financial decision-making.

"Even though your credit score may be hurt a little bit, you still may want to close accounts based on your overall financial situation," he says. "The first thing you need to do is eliminate the temptation to accumulate more debt."

If there are ways to completely eliminate that temptation -- for instance, by removing stored payment information from your e-commerce accounts -- then it may be worth it to kill the plastic but leave the account open. But if you think the bad habits that got you into debt in the first place may resurface, then don't leave it to chance: Call up the bank and do what needs to be done.

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.


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34 Comments

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itooso

Paying as quickly your credit cards is the best thing you can do, interest are very high. This way when paid off, you can start saving the money instead of just giving it to the banks.

June 06 2013 at 8:32 PM Report abuse rate up rate down Reply
Sylvie

Credit card companies are the modern day loan sharks - all too willing to enslave you and depending on your lack of will power that lets them.

June 06 2013 at 7:24 PM Report abuse rate up rate down Reply
karen and pitts

man i got into the meat grinder on credit cars a few years back. destroyed em all took out a second mortgage to do so been living on hard earned cash and a debit card since i love it the worst thing a ypung person can do is get into credit card debt, second worse is student loans. Aat fsu they actually had thieves opening credit cards for unemployed students . yoiu got a free t shirt but when card came it had a limit of 250 dolllars and the charge to open the account was 200? thats highway robbery and being a thief.

June 06 2013 at 4:58 PM Report abuse rate up rate down Reply
knightrang

This is a scam by the credit card company to have you keep their accounts open in hopes that you will use their card again. I did that and still have a good credit score and can get loans.

June 06 2013 at 3:53 PM Report abuse -1 rate up rate down Reply
1 reply to knightrang's comment
Ben

Closing Credit cards Can and WILL hurt your Credit score ... Your Utilization goes up and will hurt your Credit score.... AAoA will also get hurt and depending on which card you close. Newer cards with Low limits will have a minimum impact while your Oldest card or Higher Limits will hurt it more.

July 21 2014 at 9:25 PM Report abuse rate up rate down Reply
T Rock

My credit score went down due to not having any recent major loans- Having no auto or home loan and minimal debt was a goal to acheive when I was younger. Now you are downgraded for living within your means - I'm also on disability so my "means" aren't what they used to be.

June 06 2013 at 3:33 PM Report abuse +2 rate up rate down Reply
bri71666

These idiot credit card companies and banks want you to be in debt. This all revolves around the federal reserve. The more you are in debt the more they make. They dont care about us. its all about the money they make....period....fact!

June 06 2013 at 3:28 PM Report abuse rate up rate down Reply
bri71666

This is another way the douchebag banks stick it to you. Being responsible with your finances is bad for you...according to the banks.

June 06 2013 at 3:22 PM Report abuse +1 rate up rate down Reply
Carole

This country is in a mess, we reward the debtors with good credit scores and punish the people who pay their bills and manage their lives without credit cards. Then they turn around and write off the debt, so the credit card company loses, the vendor they purchased from loses and the cost of goods go up for everyone to cover the lose, but by god they have a good credit score.

June 06 2013 at 2:24 PM Report abuse +1 rate up rate down Reply
paddleman1928

so the question is :do you want to protect your credit score or your bank account? I would prefer to protect my bank account by not running up purchases and interest charges for purchases that are often impulse buys.

June 06 2013 at 12:24 PM Report abuse +2 rate up rate down Reply
zabada

Until we jail the bankers involved in the greatest swindle in history, along with their congressional cohorts,. we can't dismantle the credit industry and allow it to become a localized, smaller part of our lives. They continue to tell the more and bigger is better, but the3 facts are, we allowed them to creep into our country's economy and completely control our spending and living habits. Dave Ramsey is right. Use an ATM when needed, cash as often as possible and if enough of us band together and refuse to play the game, they fall.

June 06 2013 at 10:50 AM Report abuse rate up rate down Reply
1 reply to zabada's comment
Stephen Sklar

As will our economy.

June 06 2013 at 11:16 AM Report abuse rate up rate down Reply