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July 17th, 2007
Usually when you cancel a credit card it takes a few months for it to show up on your credit report. It is on an individual basis so there is no exact equation of when it will show up. Make sure that when you choose to cancel a credit card you are looking at both the pros and cons of doing so.
Cancelling your credit card can be both a good and bad thing. It can help many people on their way out of debt because it lessens your ability to slip further into debt. Also, too many unused credit cards can negatively affect your credit, so many experts advise consumers to minimize the number of credit cards in use. On the other side, cancelling your credit card will show up on your credit report.
Why is This a Bad Thing?
Credit reports break down your credit rating into 5 distinct categories:
- Payment history (35% of your score)
- Outstanding balances (30%)
- Length of credit history (15%)
- New credit (10%)
- Type of credit cards in use (10%)
Each of the five categories has different criteria in order to make an effective evaluation of your financial reliability. Even though each criteria has separate characteristics, they are all intertwined. This means that a struggle in one of the five areas will likely have an impact on another area. It becomes difficult to have a good credit score when more than one category has a low rating, in turn making your overall score low. In reference to cancelling a card, it happens to affect 3 of the categories.
1) Outstanding Balances. Credit reporting companies use a credit utilization ratio to help determine the ratio of your outstanding balances. In simple terms, the ratio is figured out by using your total credit limit (on all of your cards) and dividing it by the amount that you owe in total. When you cancel a card that has a low or zero balance (which is most likely the case), but has a high credit limit, you are significantly going to raise your ratio.
2) Length of Credit History. Most people end up cancelling cards that they haven’t used for a few years. Although this seems like a good idea to avoid headaches with credit card companies, possible identify theft, or just overall convenience, it can be a bad thing. Even if you don’t use your cards regularly, you are still establishing long term credit card history in the eyes of credit reporters. Keeping these cards and using them every so often can be a good thing to develop this long term history. When you cancel a long term card, credit reporters are forced to look your next most recent account which is often not a good reflection of your reliability.
3) Types of Credit Cards In Use. Some people make the mistake of cancelling a card that looks positive on your credit report. When reporters develop your score they look at the types of credit cards you use to find a mix that makes your less risky. If you are consistently making payments on time to multiple different credit cards (including store credit, gas stations, etc) you are proving your financial responsibility. For someone who has established credit, it is not looked at negatively until you exceed 10 (or more) cards. As long as you are making your payments on time you actually will benefit from having more cards.
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