New Jersey residents may be surprised to discover that canceling a credit card could end up hurting their credit score. People cancel their credit cards for a number of reasons: they no longer use the card, they found a card with a lower interest rate or they were unhappy with the lender’s customer service. However, canceling a card, even if it has a zero balance, may disrupt someone’s debt to credit limit ratio.
This may not seem like a big deal, but an individual’s debt to credit limit ratio is a part of how someone’s FICO score is calculated. If someone has a large amount of credit card debt on one card and cancels another, it could dramatically raise someone’s ratio and lower their FICO score. While ensuring payments to creditors occur on time carries the most weight in determining a FICO score, people’s debt to credit limit ratio is the next most important.
The way that this ratio is calculated is by dividing the amount of debt someone owes by the amount of available credit they have. Most experts recommend that this ratio stay at or below 30 percent. Therefore, if someone cancels a credit card with a large credit limit, it could dramatically raise their ratio and hurt their credit score, even though closing a credit card account has no impact.
Managing someone’s credit is important, but if an individual has enough debt, it may be beyond their ability to handle or pay back. Filing for bankruptcy may help people start over and regain control of their finances. A lawyer could help someone understand the filing process and assist them throughout.
Source: Fox Business, “How Canceled Cards Impact Credit Scores“, Erica Sandberg, July 22, 2013