Cleaning Business Owners: Is It Time to Cancel Your Credit Cards?

Can Canceling a credit card have an impact on your credit utilization ratio - FICO score?

TheJanitorialStore.com

It would seem that the best thing to do would be to cancel the credit card and shred it. But financial experts suggest otherwise. They suggest that it is a bad idea to cancel credit cards because it can cause your FICO score to drop. The acronym FICO stands for Fair Isaac Corporation, an organization that computes and publishes credit scores for viewing by consumers and creditors.

Canceling a credit card has an impact on your credit utilization ratio. This accounts for 30 percent of your FICO credit score. This ratio is the sum of the balances on all your credit cards divided by the total credit limit on all of your credit cards. Your FICO score is used to determine such things as the interest rate you will receive when you borrow money and whether you will be approved for that loan to buy new equipment for your cleaning business.

So how would that impact your FICO rating? Let's say you have 3 credit cards, each with a limit of $3000. Your total credit limit would be $9000. If you have one card with a $1000 balance, one card with a $2000 balance, and the third card you don't use, you have a combined total of $3000. Your credit utilization ratio would then be 33 percent (3000/9000=33%).

“There is no single magic number you want to aim for, but lower is better”, according to financial advisor, Suze Orman. She recommends not exceeding 30 percent. Now let's say you decided to cancel that third card since you don't use it. Think again. By canceling that third card, your total credit limit would fall to $6000. You still maintain $3000 in balances but your credit card utilization ratio just climbed to 50 percent (3000/6000=50%). Not good for you and your FICO score.

Another reason not to cancel your credit cards is that your credit score is enhanced by demonstrating a long credit history. By canceling a credit card that you have had for some time, you will be shortening the length of your credit history. If you do need to cancel a credit card, don't cancel your oldest card because it can have a direct affect by shortening your credit history and lower your FICO score.

Of course, there may be situations where you may decide to cancel a credit card account. Perhaps you have too many cards to keep track of, you need to avoid unnecessary fees, or they are just plain stressing you out. If you do, keep the oldest credit card account open to sustain your credit history, keep the cards with the highest limits, spread out the cancellations over time, and don't close a credit card account right before a lender plans on checking your credit history for a loan. For the cards you decided to keep, use them at least every couple months and pay off the balance in full as soon as you receive the statement. Make sure to monitor the statements that are sent to you from the card issuer for any annual or inactivity fees that may be accessed to your account.

You, of course, will have the final say in what is in your best interest financially when it comes to your credit cards but with the proper information, you can rest assure that it will be the appropriate one.

Jean Hanson helps owners of commercial cleaning companies build a more profitable and successful cleaning business through her online community at TheJanitorialStore.com. Jean is also the host of the popular Web TV show CleaningBiz.tv and author of the newsletter Trash Talk - sign up today!

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