Two ways how ending a credit card account can hurt your credit history

Cynthia Stewart
May 28, 2007
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If you have many credit cards and are seriously into credit card debt, chances are good that you must be thinking of getting rid of few credit cards. The strange fact is that if you get rid of a credit card without giving thought to the points listed below, you could be shooting yourself in the foot. Yes, it could damage your credit history further. Here is how this happens.

Assume that you have 3 credit cards with the following data

Card A: $2000 credit limit - $1000 Outstanding Balance
Card B: $5000 credit limit - $2500 Outstanding Balance
Card C: $10000 credit limit - $5000 Outstanding Balance

With these credit cards the data that emerges is that you have a total credit limit of $17000 of which you have an outstanding balance of $8500 or 50%. The fact is that the percentage of your outstanding balance to credit limit should be low. The credit rating agencies prefer it to be in the limits of around 30%.

Now suppose you decide to end your Credit Card A and transfer all its balances to credit card B supposing that it has a low APR. Now you have a total credit limit of $15000 and outstanding balance of $8500 (providing the balance transfer doesn't increase the credit limits). With this step your outstanding balance to credit limit ratio goes up to 57%(rounded off).

So, the net result is ending a credit card will increase your debt to limit ratio which is not good for credit history.

Secondly, the age of credit card also matters when it comes to determining credit history. The credit card that stays with you for longer than 6 months is good to keep because credit rating agencies give a lot of weight of age of a credit card. So, if you decide to end a credit card and it is an old one, give it a second thought. All the credit history associated with that credit card can be wiped out in an instant with this decision.

The picture that emerges from the above facts is that if you want to end a credit card make sure that your outstanding balance to credit limit ratio remains or becomes low and doesn't increase. Secondly, don't end a credit card which has a good long record of credit history.