Why canceling a credit card can hurt your FICO score

Why canceling a credit card can hurt your FICO scoreConsumers with a bad credit history may think that canceling a credit card will help to improve their poor FICO score, but the truth is, eliminating that line of credit may do more damage than you think.

Your credit score is determined by several criteria, with 30 percent of the number devoted to your debt-to-credit-limit ratio. This figure calculates the disparity between the amount of total credit the banks have allowed you to have and the amount you have in unpaid balances.

For example, one credit card has a limit of $5,000, in which you have charged $3,000, while another has a $2,000 limit with a balance of $400. A ratio of $2,400 versus $8,000 equals 30 percent – the lower this value, the better.

Canceling a card decreases your total overall credit limit, thus raising the debt-to-credit-limit ratio. To avoid the temptations that often come along with this borrowed money, simply keep the account and cut up the card.

If you must cancel, opt for the newer accounts, as your credit history begins with your oldest account. Eliminating an old account will shorten your history, which is also a factor in your credit score.