Does It Hurt a Credit Rating to Cancel a Paid Off Credit Card?

Overview

As people receive credit card offers with limited low interest rates, it's not uncommon to have credit card accounts opened and closed frequently to take advantage of these teaser rates. According to a major credit reporting agency (Experian), paying off and opening or closing credit cards does not hurt a credit rating as much as it once did. Other factors may still affect the total credit score when canceling a paid off credit card.

Account Age

An important factor in credit rating calculation is length of credit history. A longer credit history makes for a higher credit score. When calculating credit history length, reporting agencies use old and new credit lines to find an average history. If an individual closes a credit card he has had for a long time, it can shorten the average credit history, which may hurt a credit rating.

Balance to Limit Ratio

Having a credit card or numerous credit cards with balances at or near the credit limit will usually hurt a credit score. However, having some credit cards with little balance and higher limits will help a credit rating. Individuals closing a paid off credit card should consider what closing the card will do to their average balance to limit ratios. If a high limit credit card is paid off and closed while other cards have high balances, the ratio has just shifted, which will negatively affect credit reports.

Number of Accounts

While having a few credit cards with low balances actually raises a credit score, numerous open lines of credit may hurt a credit rating. Though a person may have nearly perfect credit in every other respect, too many open lines of credit may send up red flags for lenders who consider too much credit a lending risk. In these instances, closing a paid off credit card may help a person's credit rating with lenders.

Closing the Account

Individuals wanting to cancel a credit card should pay off the balance before canceling. A closed account that is paid in full looks better on a credit report than one with a balance. Cancel a credit card by phone and in writing. A person should request a confirmation letter stating that the account was closed at her request.

Report Accuracy

After a paid-off credit card has been cancelled, individuals should check their credit report to make sure it is accurate. Credit report mistakes happen and, when a credit report shows that the card was cancelled by the lender rather than the consumer, it reflects negatively on a credit report. If the credit report shows inaccurate information, individuals should contact the lender and request that they correct the report.

Does It Hurt a Credit Rating to Cancel a Paid Off Credit Card? by awesomecredit.com