To Cancel or Not to Cancel Credit Cards

Hi there. I am not sure if this is really the appropriate place to ask this question, but I'm desperately trying to get relevant information from people who know what they are talking about.

I have a question that relates specifically to my business.

I am in financial trouble, not unlike many businesses these days, and looking for the best option out there that will not require me to file for bankruptcy. My business is a sole proprietorship and most of the debt incurred is as a result of credit cards.

I don't particularly want to cut up my credit cards -- although my wife thinks I am foolish not to! Anyway, I have heard a lot recently about debt settlement being a good option for individuals. Does this also apply to business owners?

On a strong recommendation from a friend, I am considering calling this company: mydebtrelief.com

Before I do though, I'm making a tour of the blogs and forums to try and get some expert advice.

Please respond to this comment or email me at dallaslivemusicnow@gmail.com if you have any suggestions for recommendations.

Thanks, and I look forward to hearing from you.

Next to bankruptcy, debt settlement can seem like the lesser of two evils. There are serious downsides to debt settlement that you should be aware of though. To negotiate a debt settlement, you first have to go several months without making payments on your credit cards. During this time, you open yourself to the risk of creditors filing a lawsuit against you. Skipping payments will also severely damage your credit score.

I would not recommend going into debt settlement on cards you are still current on. If you are already more than 90 days past due, it might be a viable option. But you should talk with a business attorney who can give you appropriate advice tailored to your situation. Remember that even if you do successfully negotiate a debt settlement, you must report the canceled portion of your debt to the IRS, who will tax you on it.

I had no Idea about the importance of the utilization rate. Thanks for the tip, Carrie.

That is some great advice on handling credit cards, especially the info on when to cancel or not. This is very important as it is very easy to hurt your credit score by canceling the wrong account or loan at the wrong time or carrying too much of a balance and so forth. Good info.

Interesting information. But I think that credit cards are needed. And they are very convenient.

Credit cards are absolutely convenient, and even necessary in today's world. Never cancel cards you think you may need some day, but also avoid collecting too many cards. Sometimes, all you need are a few good credit cards (that will make keeping up with your finances easier, too).

I have had four of my credit cards raise my APR in the past two weeks. This is really going to make it hard for me to pay them off. They have given me the option to decline the higher APR but they would then cancel my credit card after my "good through this date" period. Should I let this happen or should I cancel them myself now or let things stay as they are and muddle through trying to pay them off? Michelle T.

How many credit cards do you have altogether? If possible, please provide a breakdown of your balance on each card plus the corresponding limit. Ideally, your balance on each card should be under 30% of its limit. And your balances on all of your open credit cards should be less than 30% of the total limit amount. I can give more specific advice if I learn more about your exact situation, but without more detailed information I would say that if you have other cards that have not raised their APRs, only using those from now on (that is, if you absolutely have to use credit cards at all). Opt out of the higher APRs offered by the 4 cards you mention, and focus on trying to pay off the balances on those. Then, let them close your accounts once the cards expire.

Regarding the utilization%: How do you deal with a CC company that every time you open up x-amount of space on a card, they compress the card limit. We owed $8k on a card with a $12k limit. We paid it down to $7k in January, and they lowered our limit to $7.5k. In March we paid it down to $4,800, and they lowered it again to $5k. This has also happened with another CC. How should we deal with this? Our utilization% looks worse and worse because they keep compressing the limits.

Yes, this seems to be the MO of many banks in 2009. I posted yesterday about how their actions are hurting our credit scores, making it even harder for us to qualify for future loans and lines of credit.

First of all, have you tried contacting the credit card companies that are lowering your limits? That should be your first step. Explain your situation, and try to get a reason from them why they are targeting your account. My guess is that because your utilization rate was close to 66% on your card, your credit card company is looking for ways to shield itself from potential future risk.

While it seems unfair, you're doing the right thing by paying down your credit card debt. Just keep chipping away at it. Making timely monthly payments is the best thing you can do for your credit score. Utilization rate is secondary. And just think, when you have zero balances on your credit cards your utilization rate is going to look great, even if your limits have been severely reduced.

Someone told me that if you have a credit card for less than a year and you cancel it (assuming you have zero balance at the time of cancellation), it will NOT affect your credit score, because you had it for such a short period of time. Is this true? I'm trying to find information online that will validate that claim before I proceed.

I got a credit card that was benefitting one of my preferred charities, and then they stopped benefitting that charity, so I don't want to use it anymore. I've only had the card for 5 or 6 months, and always paid it off in full, and I have zero balance on it. Is it safe to cancel, or should I just cut up the card and keep the line of credit open?

Cancelling your credit card that is only 5 or 6 months old won't damage your credit score from a credit history perspective (assuming you have other older accounts in good standing). Cancelling it, though, may still damage your score if you'll be losing a significant amount of available credit by doing so. It also depends on how many other accounts you have and how high the limits and your balances are on those.

I would say if they card only has a small limit, you could cancel it without having much affect on your score. If it has a larger limit, consider keeping it open, but just not using it except for very periodically for a small purchase here or there to keep it active (some credit card companies lately are closing accounts due to inactivity).

I have several different cards. Most are for individual stores. I have 2 major cards which I use for all my other purchases. I use one of them 85% of the time, simply because it pays cash back and has a lower interest rate. All my cards are $0 and paid every month.

Question: If you have major credit cards, like Visa & Discover, can using one over the other affect your credit rating? If one uses Visa 90% and the Discover the other 10%, can it lower the score, even if it is paid off every month??

Good question Adam. Visa, Discover, and MasterCard are types of card associations. They set the transaction terms and fees for merchants and the card-issuers. The card association on each of your credit cards has no bearing on your credit score. Your debt-to-credit ratio (utilization rate) is what matters from a credit score perspective.

So, say I have a Visa, Discover, and a few others, Nordstrom, Banana Republic, Menards, Home Depot, Old Navy, Shell, BP Amoco, etc......

Many of those I do not use. So, would getting rid of them, even though many have not had a charge on them in years, increase my score. I already have a score that is in the mid 700's, but I would like to improve on it.....

Much thanks!

Adam, The perfect mix of credit types to have remains a mystery. I can't tell you exactly how many retail versus non-retail cards to have, or how many revolving versus installment accounts should appear on your credit report. That answer varies for each person based on their overall credit situation. Some people have a near perfect score and only have one or two credit cards, and others who have a dozen or more cards might also have a great score. Just be sure not to close too many lines of credit and damage your low overall utilization rate. Also, you never know when you might need to depend on cards you haven't used in awhile. If you're really wanting to cancel some of your cards, make sure they are paid off in full first, and that they aren't your oldest cards. Canceling cards you've had from your early days of establishing your credit will hurt your score, because it shortens your average "credit age."