Maybe you’ve been ordering too much stuff on Amazon or watching your bank account shrink after spring break travel. When your spending spins out of control, one way to rejuvenate your finances is to go on a financial fast. But while chopping up your credit cards may feel cleansing, you might be surprised at what it could do to your credit score. Here’s how to think about whether to cut them up, or simply cut back.
Cutting up your cards but not closing them
If you stop using your cards — whether you dice them up or put them in the freezer — but keep the credit accounts open, your score will go up, says John Ulzheimer, a credit expert who has worked for credit bureau Equifax and credit scoring company FICO. “The primary reason you want to keep your card open is because your score benefits from the unused credit limit,” he says. Credit scores are heavily influenced by how much of your available credit you use. When you stop charging purchases to your cards, the balances you’re carrying will go down with each payment you make. Ideally, experts recommend using no more than 30% of your credit limit on any card, and lower is better. However, once you’ve paid the balance down to zero and stopped using the card completely, issuers may lower your credit limits or close your accounts if there’s no activity on them. How long it takes depends on the issuer, Ulzheimer says. “Some of them will start to reduce credit limits after 12 months of inactivity,” he says. “Some card issuers will let you go years before they do anything.” To prevent your accounts from being closed, charge a small purchase to your card every now and then and pay it off promptly, Ulzheimer says.
Closing your credit card accounts
If you take the more serious step of closing your accounts, your score is likely to drop in the short term. The reason is the same as before: Credit scores are influenced by how high your balance is compared with your available credit. Closing an account lowers your overall credit limit (or eliminates all of it if you have only one card). Now, even if you’re carrying the same balance, it represents a bigger chunk of your remaining credit, which could cause a drop in your score. “Unless you’ve got some punitive annual fee on a card, I can’t think of a reason to close it,” Ulzheimer says. You may want to go on a spending fast right now, but your score will matter if you apply for a loan or credit card down the road, he says. A credit card can also be useful in case of emergencies. Pair it with a decent emergency fund so you can pay the balance back down as soon as possible.
Turn your spending fast into a healthy diet
A fast is a temporary measure. To keep your spending under control long-term, start tracking your cash flow, says Daniel Milks, a certified financial planner and founder of Woodmark Wealth Management in Greenville, South Carolina. “Figure out where your money is going and where it’s coming in,” he says. “The more you know about yourself and what you’re spending on, the more equipped you are to control it.” Armed with that knowledge, you can build a budget that helps you cut back on expenses and save for bigger goals, like paying off debt or saving for a down payment.