Should I Cancel My Cards as I Pay Back my Debt?Apr 18, 2018
Resolving to pay back your debt deserves a pat on the back. Not only can it help you improve your monthly cash flow, it can also improve your credit score. This month’s podcast is all about credit scores, and the impact they have on your financial health. Read on to see what advice our LITs have about paying back your debt, and, some key factors to consider.
I’ve decided to aggressively tackle my debt – should I cancel each card as I pay it off?
Cutting up your credit cards or cancelling your accounts may seem like the first step to avoid using those debts again. Here are some instances where you should not take such drastic measures:
- Cancelling your only credit card with available credit – Your credit score can be affected negatively by the amount of credit you utilize. This means, if all your cards are maxed out, you will have a high credit utilization. This can signal to lenders that you are a risky borrower and more likely to default on your loan. Instead, keep your card with available credit to keep your credit utilization lower. Then focus on paying off your other credit cards to reduce the utilization amount on each.
- Closing your ONLY credit account – One factor in calculating your credit score includes the type of credit you have. If you only have one credit card, keep it and use it to make small purchases you can pay off each month to show lenders you are able to manage a variety of credit types such as a credit card, an auto loan, a mortgage, etc.
- Closing your oldest credit card – Your credit history is stored for up to seven years in your credit report. By closing an older credit card, your credit payment history can be shortened and could classify you as a risky borrower.
What is the alternative to cancelling my accounts?
Sixty-eight per cent of Canadians in Manitoba and Saskatchewan don’t understand how their credit score is calculated. Take some time to improve your financial knowledge by visiting the FCAC website. In the meantime, use these strategies to improve your credit score and reduce debt:
- Utilize 30 per cent or less or your debt balances. Calculate your credit utilization here.
- Pay your bills on time and in full each and every month.
- Maintain a good payment history on a variety of debts.
- Follow a budget so you can reliably predict upcoming expenses.
- Access a free copy of your credit score from Equifax (call 1-800-465-7166) or TransUnion (call 1-800-663-9980).