How does cancelling your credit card affect your credit score?

Found this nice article today about the effects of cancelling your credit card on your credit score. As we’ve discussed previously on, cancelling a credit card (for example, when your transferring to another card with a 0% APR intro rate) can actually damage your credit score, because your credit utilization ratio is changed, an important part of your overall credit score.

Think of it like this: you have $2,000 balance on a $4,000 limit card, and then you transfer the balance to a new card with the same limit. At that point, between the two cards, you are using $2,000 out of a total available credit of $8,000, so your credit utilization ratio is 25%. When you cancel the first card, you’re now using $2,000 out of a possible $4,000, which means your credit utilization score has shot up to 50%. This doesn’t look so good to the credit bureaus.

Jeremy Simon goes into more detail in this excellent, and very readable article at:

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