With nearly 75% of Americans shopping with credit cards (1), this form of payment is undoubtedly popular. In fact, it’s quite common for Americans to carry multiple credit cards in their wallets.
Take Jane, for example. After learning about the rewards and perks that many credit cards offer, Jane decided to take advantage by filling her wallet with more than 20 different cards. And while that’s a lot of plastic, Jane is not the only American to carry more than one credit card. According to Experian, Americans carry an average of 3.7 credit cards that they use regularly. (2)
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Jane carries many more credit cards than the national average, and despite the fact that she pays them off every month and has good credit, she no longer sees the benefit in carrying so many cards.
With this in mind, Jane would love to significantly cut down on her number of cards, but she’s worried about the impact this could have on her credit score. A friend of hers told Jane that canceling credit cards can cause her credit score to drop, and her friend is correct.
When canceling a credit card, it’s important to think carefully about the impact it may have on your credit score, which significantly affects your financial well-being.
How canceling credit cards affects your credit score
Canceling a credit card can impact your credit score in a few different ways, though the impact is usualy temporary:
- You lose your positive payment history, and payment history is the most important factor in calculating your credit score, accounting for 35% of your overall score (3)
- You increase your credit utilization ratio because you lose that card’s credit line. Utilization ratio is the ratio of credit used versus credit available. Canceling a card removes that portion of credit from your available credit, but since the credit that you’re using doesn’t drop, you end up using more of your available credit. This ratio is the second-most important factor in the credit scoring formula, and a lower utilization ratio is better than a higher one (4)
- You shorten the length of your credit history and change your credit mix, both of which are also factored into your score
The specific amount that your credit score can drop varies based on many factors, including how many other credit cards you have, how old they are and how much of your available credit you’re using. (5)
For Jane, canceling just one of her more than 20 credit cards may not hurt her score that much, but canceling a lot of them is likely to have a negative impact on her credit profile.
Should Jane cancel some credit cards anyway?
There are some instances in which canceling a credit card makes sense, despite the small, temporary hit to your credit score. Deciding whether or not to close a credit card can be tricky, and it often helps to weigh the risks against the rewards.
For example, if you are struggling to keep track of all of your credit cards and are often late making payments, canceling a few of them can be justified. Late payments can have a very negative effect on your credit score.
Furthermore, if any of your credit cards have annual fees and you aren’t using them enough to justify the cost, or if the interest rates are a little too steep to carry a balance, closing those cards may also make sense.
However, there are a few instances in which it might make sense to keep a credit card. For example, if your credit cards don’t have annual fees and you aren’t overspending on them, there may be little reason to close those cards. You also may want to keep a credit card open if it’s your oldest credit card account, or if you have no other credit cards.
While Jane’s credit score may drop a bit after canceling a credit card, the drop is usually temporary. As long as she continues to make on-time payments on her other cards, the impact shouldn’t be too dramatic and her credit score should recover.
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How to decide which credit cards to cancel
If Jane decides to cancel a few credit cards, she should first focus on the ones that have an annual fee. If she isn’t using them regularly, there’s no reason to pay a fee just to avoid a small hit to her credit score (especially if she isn’t expecting to take out a big loan any time soon).
Next, Jane should focus on closing newer accounts or accounts with the lowest credit limits, as this will make the impact on her credit score a little less dramatic. The credit bureaus tend to favor a long history of using credit responsibly, and cancelling an older card could hurt her credit when that account no longer appears on her credit history.
Jane should then consider which credit cards have the best rewards programs that are well matched to her spending. If she were to keep those cards and pay them off — or at least pay them down a fair bit — this could help Jane with keeping her credit utilization ratio down during the process of canceling the cards she no longer needs.
By being strategic, Jane can cancel the cards she doesn’t need while limiting the affect it will have on her credit score. She can also close the undesirable cards slowly over time, rather than all at once, to further limit the impact on her credit score.
How many credit cards is too many?
For Jane, who no longer wants to carry more than 20 credit cards, it makes sense for her to try to slowly pare that number down.
There is, however, no standard number of credit cards that an American should carry. Sticking with the national average (three to four) would give Jane the chance to benefit from rewards programs that target different spending, without giving her too many to manage.
But it’s ultimately about what Jane can handle. If she has so many credit cards that she can’t keep track of payments and isn’t regularly redeeming rewards or using the perks, then she should make a change.
Carrying 20 credit cards is a lot to deal with, so remember that each time you open a new card to get bonuses or rewards, you may be potentially creating a headache for yourself down the road.
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Bankrate (1); Experian (2, 5); myFICO (3, 4)
This article originally appeared on Moneywise.com under the title: I have more than 20 credit cards — but I don’t need them all. Would canceling a few cause a huge hit to my credit score?
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.