Cancelling the credit cards – should you do it ?
If you just can’t do without credit, you’ll normally have a couple of the major credit cards in your financial arsenal. But what can you do if your wallet is bulging with all those credit cards, most of which you haven’t really used for some time? Should you cancel it? That appears to be a no-brainer question. Closing an unused credit card is the best way to prevent future debts, and helps you in securing your great credit rating. This seems like a win-win situation – but not if you are planning on applying for a loan anytime soon.
Should I Cancel My The Credit Cards
While it may be good to cancel an unused credit card in layman’s theory, it can prove to be at your disadvantage if you are considering on financing a car or home purchase with a loan. This is because the total debt on all your credit cards has a significant effect on your credit score, which is in turn one of the evaluating factors used in loan processing.
Models used for credit scoring use a variety of aspects in the process of calculating your credit score, not excluding the results of dividing the total valued amount of your debt on credit cards and your revolving accounts, by the valued total of amount in available debts which is found on the same accounts.
The equation should result in a value which is less than one, and the lower the value, the better you are off. A value equal to one means that your outstanding debts are equivalent to your available credit, and would also mean that you have maxed out all of your cards.
Canceling An Unused Credit Card
Canceling an unused credit card without paying of the credit debt results in a ratio change, which makes it look like the card user is overextending the limit. Since your credit score is significantly dependent on all your available credit lines, it is best to hang onto all of them, at least after you have that loan application approved, and the money is on hand. But if the balance on your credit cards is virtually zero, closing as much unused accounts as you wish won’t put a dent on your credit score, and it is better if you do away with some them anyway.
Not closing unused accounts is a good way to qualify for a loan, but if you have trouble with credit or had to deal with the situation in the past, another opening of credit line means more temptation for spending, and it would be best to close it.
Once you’ve been approved of the loan and you wish to do away with some of your credit cards, be sure to pay off the balance before you close the account. Card companies are wary of customers who are looking for a way out of their system, and will deliberately jack up the interest rate on your remaining balance if they sense that you are planning on pulling out.
If it proves too late for them to do that, they may offer you perks by upgrading the status of your card, or by offering you two-for-one air trips. The decision to stick with them or to pull out is all on you, but be sure that it is you who receives the better end of the deal before you consent to the continuation of your account.