Credit

Ask Jean Thursday: To Cancel or Not to Cancel?

Posted by Jean

Hi Jean—I caught the end of your segment on the Today show a few weeks ago where you were talking about credit cards. You said that one should never CANCEL a credit card, as it negatively affects your credit score. Instead, you said cut up the card and don’t use it. HOWEVER, what do you do in a case where the credit card company charges an annual fee? If you cancel, your credit score suffers; if you don’t, you’re stuck paying the annual fee. How do you handle that situation?

-Pat Bosha, Schnecksville, IL

You’re right-if you cancel your card; your credit score will take a hit. If you don’t, your creditor will force you to pay the annual fee for being a cardholder… and that’s something creditors are doing more frequently to mitigate the effects of the Credit Card Reform Act, whose first wave of reform took effect today. According to Synovate, a company that tracks direct mail, credit card issuers are sending fewer credit card offers to households, yet a higher number of those offers now have fees attached to them.

So which is worse, paying the annual fee or having a credit score that’s a bit lower? According to Credit.com’s John Ulzheimer, over the years, it may actually cost you more money if you keep paying the annual fee, versus cancelling the card and potentially paying a higher rate on an auto loan or a mortgage.

If you’re absolutely sure you want to cancel the card and avoid the annual fee, Ulzheimer suggests that before you close the account, replace your soon-to-be lost line of credit with another card (that doesn’t have an annual fee). Doing so will protect your credit utilization ratio-a number used in calculating your credit score. The utilization ratio compares the amount of credit being used to the amount of total credit that’s available to you. A low utilization ratio is great for your credit score-it means that you have a lot of available credit but not much debt. By replacing the line of credit attached to the card you’d like to cancel with another line of credit from a card with a card with no annual fee, you’ll be in the same position utilization-wise as you were before, with no annual fee and a credit score that’s still in-tact.