Thursday, June 14, 2018

Canceling your credit card will damage your credit

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A big part of managing your credit is understanding what can help and hurt your credit score. If you have enough of these rewards, you can slowly establish the type of score that creates the opportunity for you, and save you a lot of money by reducing the interest rate on major purchases (such as home and car). There is a lot of wrong information about credit scores, and one of the more common error messages is that canceling old credit cards or other unnecessary credit cards will help your rating. This is not necessarily true - that's why:

You want your debt-to-credit ratio to work for your score rather than your score. Your debt-to-credit ratio is the amount of available debt you currently use divided by the total available credit. If you use less than half of the total available credit, this ratio will help your score. When you cancel a card, you will remove the credit limit from the available credit.

To better illustrate this, we assume that your credit card has a $5,000 balance with a credit limit of $10,000. Five thousand divided by the debt-to-credit ratio of 10,000 equal to 50%. This can help your credit score, but if you buy a new refrigerator by charging $1,000 on the same card, your debt-to-credit ratio will rise to 60% and begin to work on your score. If you maximize the use of the card, the percentage will rise to 100, which may hurt your score.

In addition, your debt credit ratio works the same way in all credit accounts. The credit bureau looks at your cumulative credit limit as well as the total limit you are currently using; if it is at 50% or lower, it will help your score. If your rate exceeds 50%, the lender begins to tickle your risk of default. The lender is inherently itchy, so you don't want to inspire them to itch more than 50%.

When you cancel a credit or business card that you no longer use, you will reduce the available credit. In order to maintain the enthusiasm of these credit lines, use them once every once in a while; just be sure to pay them quickly. (If you do not use a credit card, the publisher will cancel it forever.)

Hope this eliminates one of the more common myths about credit scores and cancellations of credit cards. Stick to these credit lines, use them occasionally, and pay them off immediately, and they will continue to work for your score.


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