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."

Hi Carrie:

I got married and we are trying to consolidate credit cards. We share a Amex card already and would like to get a MC/Visa as a backup.

I have a airline mileage visa with a 20K limit on it and a zero balance. I have had it for ~9 years and never been late or ever carried a balance on it--but it is $60/year and I would rather have cash back and/or a no-fee card. I don't feel like the $60 equals much when it comes to the mileage benefit.

I called the credit card company and they said I cannot change out of this card to a no fee card. I have to close it and get a mileage business card or cancel it totally. Nice.

I am thinking of just canceling it totally. We already have a house and don't plan to buy a car in the next two years. We both have really good credit scores already (700+). I have a no fee MC (that I have owned for ~9 years as well) from our insurance company that would be a great back up.

What do you think I should do about the mileage Visa?

Thanks.

Mike, Congratulations on your recent marriage! I'm glad to hear you and your spouse are openly discussing your finances; you're off to a great start!

If your Visa was your only card with a long history attached to it, I'd be hesitant to advise you to cancel it. But because you have a no-fee MC that you've also had for 9 years, your credit history won't be dramatically shortened.

You may see a small dip in your credit score because you will have less overall credit available to you, but it sounds like you keep your balances low so your utilization rate should remain in good shape. And, as you say, a slight drop in score should be okay as you aren't applying for any new loans in the near future.

You have a great credit score and shouldn't have to pay for a card with benefits that you don't really feel are worth it!

Hi Carrie!

I am 19 years old and I have a lot of credit cards. I have a total on 12 credit cards. 9 of them are department stores. 3 of them are visa or mastercards. I have balances on 3 of the cards and they are very small. One of them is card I use on a regular bases and I pay it off always and never have interest. One of them is for a bed that will be paid off in one month. One of them is a computer that I will also have paid off in a month or two. Both of these have a no interest for one year one of them the year is almost up and the balance 0. One I got a few months ago in order to get a computer, but I still would like to pay it off and not wait so long.
I really want to cancel some cards because I applied to a major credit card with a miles program and was not accepted because it says I have to much open credit available. I am very good about my credit to never have any interest rates because right after I buy something I keep the receipt and send the money online right away that night and it goes right back down to 0.
To be honest the reason I got all these cards is because I know I am responsible and I use the cards as if they are just like money because I never let any interest build up might as well because most cards give you a reward after you spend a certain amount.
Now I realize though that is was probably not the best decision because I can't get a decent main credit card with good rewards because I have to much of open credit.
Some of the shops i really would not mind canceling they are cheap stores and or I hardly shop there at all.
The bed credit card with the highest balance will close soon when it is all paid off anyway so I don't know if I should just wait and not cancel anything and when that one is closed it will be better. Or should I also cancel a few of the department ones as well? And if so all at once or what?
Hope I was clear. Thank you very much for the help!

Michelle

Hi Michelle,
Because you have a short credit history, you haven't really had time yet to prove yourself as a responsible borrower. That's great that you're paying down your cards so quickly and have a $0 balance on most of them, but new lenders might still worry about your potential for maxing out all those cards. In your case, I would say closing a few of the retail cards would be okay. But that won't mean you'll be able to turn around the next day and get approved for that mileage card you want. It may take a few years to establish some solid credit history before you qualify for anything new, and just because you cancel credit cards doesn't mean they fall off of your credit report immediately. In the meantime, keep paying down your balances so you avoid paying interest, and don't apply for any new cards. At the cash register, when they tell you you could save 10% today by applying for a store card, just say no! Out of curiosity, have you checked your credit scores lately? That would be another good step you should take.

Carrie,

Yes, the last time I checked my credit score I had a 705. This was done probably about a month ago.

Michelle

You should be proud of that score, especially as a 19-year-old with 12 credit cards in her name. You obviously have the discipline to not let your spending get out of control, and understand what a waste of money paying interest is. I think in time, as your credit history gets longer, you'll see your score go up even more.

Thanks so much for all the great advice Carrie! One more question though because I definitely want to cancel some of the cards like you suggested. Probably about three that I really don't need. should I cancel them all at one or is there increments to when I should close them, like 1 every three months or something so that my credit score does not drop drastically.

Michelle

I would cancel one at a time to see how each cancellation affects your credit score. Wait at least six weeks between cancellations. Consider enrolling in a credit monitoring service so you don't have to remember to keep tracking down your updated credit scores (a good credit monitoring service will give you continuous access to your credit scores from all three bureaus). Good luck!

Is it best to report the card stolen or cancel it. I have a balance the rates are high. So I don't use it what is the best way. Someone told me to report it stolen and tell them not to send me a new card. Is that the best?

Reporting your card as stolen will not erase your existing balance and high interest rate. You are still liable for any charges you made. Also, you should always pay off your balance in full before canceling a card.

i have been fighting with equifax over and over about a release of lien. on my credit report - which i pay for @ $9.95 per month the lien barely says released - it shows a date released but not zero balance under public record info - this has to be re-explained to most lenders - i have paid this in full - there is no doubt - why willthey not make this very clear in the report. - also - why would inquiries count for so much if there was no new loans - and why if i pay off items early does it not say outstanding ?? pays early - something to set me apart from the norm. ?? you say my score is good - i want it better -

Hi Mary,
You'll need to take up how your tax lien is being reported directly with Experian. If the information they are reporting about you is inaccurate, they are legally obligated under the Fair Credit Reporting Act to fix it.
New credit inquiries have a very small effect on your score. New account openings have a larger effect.

Credit Card dilemma.

Currently I have the same card since 1995, at the time it was a master card with MBNA. Great, great company while with them I converted to an AMEX card, (they where the first company to offer an AMEX outside of American Express.) Then trouble begins when they were bought out by Bank Of America (BOA). My main question is this. BOA is starting to charge an annual fee of $29. I have never and refuse to pay an annual fee for a credit card. Reason have a great credit score and balances have been paid in full each month for years. If I cancel this card because of not paying the annual fee I lose a huge chunk of great credit history. So I called BOA to see if I could get the fee waived, their response was "no." Next question to BOA can I change to another card like visa or master card to maintain credit history and avoid the credit history, response was no.

Personally I would love to close the account but is this a wise decision? I have a second credit card which is a visa for only one year, and a coupe days ago applied for the AMEX associated with Costco.

Your thoughts?

That's a really tough decision. I totally agree that you shouldn't have to pay annual fees; you're a great credit user and shouldn't be punished for that. This is BofA's new "experimental fee," and it will range from $29 to $89 for poor and stellar credit users alike. The decision to cancel it depends on if you have a large loan you need to apply for in the near future. Are you planning on buying a car or home in the next few years? If so, a $29 fee per year might be worth the lower interest rate you'll receive on your loan by having the best credit score you possibly can. If you have no plans to apply for a large loan, then your credit score can stand to take a bit of a dip and it will rebuild over time. And who knows, once you call to actually cancel, BofA might be willing to drop the fee! Keep us posted on what happens, and the kind of drop you see in credit score if you decide to cancel. Best of luck.

I have 3 visa's,3 department store cards, and I just opened a Discover
card. I have a balance on one major and always payoff the dept. store cards. Should I cancel one of the visa cards?

That's a personal decision. You certainly don't need more than 8 credit cards. If you do decide to cancel, make sure it is not your oldest card. I would also suggest calculating your overall utilization rate as it stands now and as it would be once you cancel one of your cards. And pull your credit reports and scores if you haven't already! You want to make sure each account appears on your credit report as it should and that there is no information missing (like missing card limits, which could make you look maxed out when you're not).