Email question: Do I cancel or cut-up my credit card?

Hi Pete,

I have a question regarding canceling a credit card. I have a card that I opened in college and paid off over 3 years ago. At the time the bank told me they strongly advised against canceling the card because it would reflect poorly on my credit score, so I cut the card up and haven't carried a balance.

Now I'm working through managing my current finances with my Dad (also a financial advisor) and am getting ready to transfer some outstanding credit to a 0% interest card --we debated if I should cancel my current card after doing so. Considering what the bank had previously told me I said I would just cut it up but leave it open, he disagrees and says to cancel.

Any thoughts or articles you know of that may shed light on the best practice in this situation? I thought for mortgages (and stuff like that), companies want to see you had possible ways to pay (open lines of potential credit)--Dad says that's inaccurate and companies see that as potential ways to accumulate more debt.

Any guidance would be appreciated!! Thanks!

Kind Regards,

Kate

Hi Kate,

I took your question to the airwaves last week. Listen to the clip below from The Pete the Planner Radio Showcourtesy of 93 WIBC:

Kate, the answer to your question depends on your credit score:

If you have good credit

If you have good credit I recommend canceling the card. Here's the thing, canceling a credit card will always ding your credit score, but if you have good credit you will recover within a year. Using cash is always better, so ridding yourself of the temptation is the best way to move forward toward financial wellness.

If you have no credit

If you are trying to establish credit for the first time then I would not recommend canceling the card. Establishing credit takes time and your credit card history matters. You can read more about establishing credit for the first time here.

If you have bad credit

If you have a bad credit score and you are trying to repair it do not cancel your card. The length of your credit card life matters and the ding from canceling will be harder to recover from. Just a side note: Taking out a bunch of new cards won't help if you are trying to repair your credit. The real factor needed to repair your credit? Time.

So there you have it, my answer for all three types of credit score levels. It's a pretty cut and dry answer for each type. The bigger issue to me is that you opened a new card. Opening a new line of credit can hurt your score even more than canceling a card.

Assuming you have a decent credit score, your Dad is right on this one Kate.

Pete