Photo: Flickr / orphanjones
Credit cards can be both the angel and the devil on your shoulder; simultaneously a force of good and evil! Further, what’s the difference between cancelling a card and just cutting it up?
Depending on who you talk to, people will try to convince of all of the above.
Should you cut them up, or cancel them?
Sounds confusing, but the truth is that there are pros and cons to each option.
cancelling Your Card
• Probably the most obvious one here is that it absolutely prohibits you from incurring further credit card debt on that card, no way around it. If you are in trouble with credit card debt and late payments, your credit score is likely already suffering and it’s probably a good idea to cancel your cards after you pay them off to keep you from digging yourself any deeper.
• Some people simply feel better about streamlining the mess of cards they’ve acquired over the years, yours truly included, particularly those store cards with the ridiculously high rates that totally negate the 15% off you received to open the card. The average amount of cards carried by Americans is close to 10, at that level, a little spring cleaning may be in order!
• Less cards means less bills to pay and keep track of (if you’re the reconciling type.) Simplification goes a long way in making your life easier.
IMPORTANT: Before you cancel a card, verify with the creditor that it will be reported to the credit agencies as having been closed “at the customer’s request”!
• When you cancel a credit card, you eliminate that card’s time since origination from your overall credit history total (15% of your credit score.) Further, while your length of history for that card disappears, any late payment history does not. Payment history (35% of your score) for that card will continue to be figured into your score even though the account has closed. Tip: Use your judgment with this one. For example, if you’re keeping 3 major cards that have been open forever and you just want to close two small store cards that you’ve only had a year, the impact will be minimal.
• cancelling a card has an additional negative impact on your score: reducing your total credit capacity, which is the denominator in the debt utilization calculation (30% of your score.) For example, let’s say you have two credit cards: Card A has a balance of $3,000 on a limit of $5,000 and Card B has $0 balance on a limit of $5,000. Your overall utilization percentage is 30% with both cards ($3k/$10k), however, if you close Card B your utilization will be 60% ($3k/$5k.) Tip: If you wish to close a card, see if you can get your limit on another card increased so your overall utilization is not affected.
Cutting Up Your Card
• Physically destroying your card effectively reduces the temptation to use the card and increase your debt level, while still maintaining your history and credit capacity. Your account will remain open; you just have put a roadblock between yourself and your usage of the account.
• If this tactic works for you, not only are you abating your debt level but you’re also exercising spending discipline overall, since quite often the only reason we choose to spend is that we can delay actually paying for it!
• If you really have a problem with debt and/or spending, simply cutting up your card doesn’t entirely eliminate your ability to incur additional credit card debt. The account is still open and you can get around that minor obstacle if you really want to, especially of the card information is stored online on sites like Amazon.com.
• You’re at risk for identity theft if you don’t dispose of your card properly. If your shredder is capable of shredding a credit card, this is best. If not, cut horizontal through your number, in between each group of four numbers, and separate the security code from the embossed number on the back of the card.
It’s also a good idea to throw away the pieces in separate trash bags.
Whether credit cards do good or evil depends on YOU: your overall debt load, your spending habits, your debt repayment history, etc. It’s a highly personal issue and one that requires common sense and judgment, specific to your unique situation.
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