A friend has accumulated many, many credit cards over the years. She admits she signed up for some of them just to get the store discounts, never planning to use the cards for long. With so many pieces of plastic weighing down her wallet and so many monthly statements coming in, she wants to streamline and cancel all but one. But should she?
“This is a really common question when I go out in the field,” says Paul Le Fevre, director of operations at Equifax Canada Co., one of two national credit bureaus. (The other is TransUnion Canada, which didn’t respond to an interview request.) “It depends on consumer’s circumstances at the time.”
The most prevalent reason people are hesitant to cancel credit cards is the concern that doing so will adversely affect their credit score. That’s certainly possible, Le Fevre explains.
“If someone is going from multiple cards with 20 per cent utilization on each of them and doing a consolidation to one product at 100 per cent utilization, that utilization factor could perhaps have a negative impact on the score because of the high balance,” he says. “But over time, as the consumer pays down that debt, it will have a positive impact on the score as the utilization goes down.”
Credit utilization rate is one of the key factors that makes up a person’s credit score. It’s the amount of outstanding balances on all credit cards divided by the total of each card’s limit, expressed as a percentage. For instance, if you have a $2,000 balance on one card and a $3,000 balance on another, and each has a $5,000 limit, your credit utilization rate would be 50 per cent. Credit issuers typically like to see a credit utilization rate of about 35 per cent or less. (Another main driver from a scoring perspective is payment history—whether you pay your bills on time.)
Given that low utilization rates make for a strong credit score, insolvency counsellor Margaret Johnson, president of Solutions Credit Counselling Service Inc., advises against cancelling credit cards.
“You could have five credit cards and only be using one of them and that’s not going to hurt your credit rating; in fact it will improve your credit crating because when you have active credit cards with a zero balance, that’s the most points you can get,” Johnson says.
“I understand people might be concerned about using them [all those credit cards],” she adds. “If that’s the concern, cut them up or put them in a safety deposit box; I’ve heard of people freezing them in the freezer. But do not throw them away.”
Keep in mind that it’s harder to qualify for credit as people age and their incomes go down. So, if you have access to a number of cards now, and healthy spending habits, why not keep them?
If you’re still determined to get rid of some of your cards. Le Fevre notes that consumers can request that the reasons for cancelling be noted on their credit report.
“It’s always a good idea for the consumer to indicate to the credit grantor [when cancelling a card] that they want that narrative added, that it was closed at request of the consumer,” Le Fevre says. “Consumers can add a statement on their Equifax report saying they went through consolidation, for example. Any narrative…just tells the story a little bit more.”
People should make a habit of obtaining and reviewing their credit report regularly, Le Fevre reminds.
“It’s very important that consumers verify the information on their report on a regular basis to ensure it’s complete, accurate, and up to date,” he says. “We do recommend checking at least once a year—ideally not two days before the conditional purchase on their dream home is going to expire.
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