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Time to get rid of some of the credit cards you no longer use

Posted by Cheryl Costa  April 5, 2010 10:05 AM

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One of the most popular credit card related questions I see is "I have several credit cards that I no longer use, I'd like to get rid of them but I don't because I think it will hurt my credit score".  While it is true that your credit score can be hurt by closing out a lot of your accounts all at once, it generally still makes sense to close at least some.  This statement is especially true now that several credit card issuers are beginning to impose inactivity fees if you don't use your card at least once every twelve months.

In order to decide which cards (and how many cards) to close, you need to look closely at your credit utilization ratio.  This ratio is computed by adding all of the credit card debt you owe and dividing that figure by the total credit limit you have across all your cards.  For example, if you have $10,000 in total credit card debt and you have 10 cards which each have a $10,000 credit limit, your credit utilization ratio is 10 percent ($10,000 divided by $100,000).  If you close out two cards that you no longer use, your credit utilization ratio would increase to 12.5 percent ($10,000 divided by $80,000).  This relatively minor change in your credit utilization ratio would likely have only a very small impact on your credit score.  However, closing out 7 of your cards could send your ratio soaring which would likely result in a hit to your credit score.  So, the plan should be to get rid of cards you don't use gradually.  Alternatively, you can agressively pay down debt so even if you close some accounts, you can keep the ratio unchanged.

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ABOUT MANAGING YOUR MONEY
Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of CardHub.com, a credit card and gift card marketplace, and WalletHub.com, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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