Do You Need to Cancel Your Credit Card?

Knowing when to apply for a credit card, when to use it, how to pay it off and when to tuck it away in a drawer can be a complicated thing. Credit cards can be lifesavers for those in nasty situations, but they can also be akin to a bottomless black void that sucks in the naive and drowns them in debt. If you use your credit card as a safety net for every little expense, it might be time to examine your credit woes. But do you need to cancel your credit card?

First of all, credit cards which aren't used don't do any damage to your credit. Unless you pay an annual fee, you won't be charged anything for your inactivity. It is possible to have a credit card for twenty years, not use it, and suffer no consequences. However, you have to understand how credit cards work, and how credit cards affect your credit score.

Amount of Credit Available
When you apply for a loan or a line of credit, the lender will run a credit check. They will discover whether you have dilinquent accounts, how well you pay your bills, and how much credit you have available to you. Every credit card currently open under your name has a credit limit, which can be anywhere from a couple hundred dollars to several hundred thousand. The amount of credit available to you through credit cards can affect whether or not a lender extends credit.

Credit Card Payment History
A potential lender can also view your payment history and find out if you have any outstanding accounts. If you pay your credit card debt on a regular basis and keep a small or zero balance, then you're more likely to have credit extended to you. However, if you have multiple open credit card accounts but never have a balance on any of them, the lender may view this as a negative red flag. It shows the inability to manage your credit cards and your finances.

Multiple Cancellations of Credit Cards
It can also be a negative red flag if you suddenly cancel several credit cards. Let's say, for example, that you find yourself in several thousand dollars worth of debt. In a panic, you call every credit card in your wallet, thinking that if you don't have the option to spend, you won't. However, the next time you attempt to take out a loan or a line of credit, the lender will see this sudden cancellation of your credit cards. Again, another red flag.

Should You Cancel Your Credit Card?
If you have a credit card in your wallet that you simply don't use, or that you don't want, there is no immediate penalty for cancellation. You won't have a black mark on your credit report. However, you should carefully examine the reasons for cancelling your credit card. Is it because the annual fee is too high? The interest rate is undesirable? You've had problems with the credit card company in the past? All of these are valid reasons for wanting to cancel your credit card. However, if you are just looking to dump avenues of credit, you might want to think again. If there isn't an annual fee, you won't be penalized for leaving the credit card open.

Final Words
Consider evaluating exactly how much credit you have available to you. If you believe it's too much - for example, it might deter a lender - then begin to whittle it down. Don't go out and cancel all your credit cards at once, but slowly begin to weed them out. When you have too much credit available to you, potential lenders might not want to issue you a loan or line of credit in the future. However, don't make any rash decisions. If you're unsure, contact a financial advisor for more information and for an individual consultation of your credit.

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