With the increased emphasis today on credit scores in securing a mortgage, many people have been scrupulously reviewing their outstanding debt and credit cards.Â The prevailing â€œwisdomâ€ is that you should cancel credit cards that are not used at all are used very infrequently since â€œexcessâ€ credit is bad for your credit score.
Contrary to popular belief, credit scores do not penalize you for having too much available credit.Â A consumer credit score is made up of five key components:
(1) Payment History â€“ 35%Â Types of accounts (credit card, mortgage, etc.), accts paid as agreed, number of past due accts., etc.
(2) Amounts Owed â€“ 30%Â Balances of current loans, debt-to-credit ratio, proportion of installments still owed, etc.
(3) Length of Credit History â€“ 15%Â Time since accts. Opened, last activity, etc.
(4) New Credit â€“ 10%Â Recent inquiries, new accounts, etc.
(5) Types of Credit Used â€“ 10%Â Mortgages, credit, retail, etc.
Keeping this in mind, if you decide to eliminate some of your credit cards, it is best to keep those that have been opened the longest and those that are in good standing.Â Also, major bank credit cards have more impact on your credit than a department store card.
Closing a credit card can greatly affect your credit scores: however, sometimes you may have no choice.Â Many times a credit card card company will reduce your credit line or close an account that is rarely used or unused, even without your approval!Â This will affect your credit score just as much as canceling the card yourself.