Cancel Credit Cards Very, Very Carefully

Here's how to cancel a credit card: Arm yourself with the latest issue of The New Yorker (the fiction issue should suffice) and backup reading material, like People, in case the hold music is particularly distracting. Get one of those buckwheat neck-support cushions, a beverage, and a snack, and find a comfy seat.

Now you're ready to dial the number on the back of your unwanted credit card and advance through the customer service phone-tree jungle. Hope you haven't made any plans for later tonight!

If such an endeavor gives you pause, good. Because canceling credit cards may actually hurt your credit score more than it will help. Yet many people streamline their wallets thinking that fewer cards will make them look better to lenders.

Hang up the phone and read on before you dash off "Dear John" letters to your lenders.

The Truth About Canceling Credit Cards

If you're like the average card-carrying U.S. citizen, you have got about eight credit cards in your wallet, and probably only a few of them are regularly in play. It's tempting to do a major spring cleaning and dump all of the dusty cards from your wallet at one time. However, cutting off too many lines of credit at once can give the wrong impression on your credit score. But bear in mind ...

Closing accounts will not undo anything. Once a credit card is in play, there's no denying its existence. It's on your permanent record -- your credit report -- for at least seven years. Yes, even if you cancel the card the next day. Same goes for any red marks associated with your accounts, such as late payments, charge-offs, and overspending. Sorry. You simply can't deny your past. But at least it will fade away and, for most negative entries, fall off your report in seven years. However, you might not want some entries to disappear.

Why deny the good? Removing old closed accounts that have no negative items is a bad idea, because you benefit from a long credit history, and those accounts speak to that history. (Good entries can remain on your report forever.) Remember: 15% of your credit score is determined by how long you've been borrowing.

Closing accounts might hurt your FICO score. Lenders take a hard look at the ratio between the balances on your revolving accounts and your total available credit. If you do have debt, try to keep it to less than 30% of your available credit. (The ideal number here is, of course, 0%.) Go ahead and keep those lines of credit open, but don't be tempted by untouched lines. When you close out open accounts, those credit lines are no longer factored into your ratio. Thus, your debt as a percentage of available credit will increase. Ouch.

Why cancel cards at all? It may sound as though the lending industry loves customers who have gobs of plastic, but as with most things in life, it's best not to binge. According to Fair Isaac, once you acquire more than seven revolving debt accounts, your FICO credit score begins to suffer a little. And although simply closing accounts won't necessarily have an immediate positive effect, over time it could boost your credit score. So let's see whether it's time to break up with some of your banks.

Which Cards to Hold and Which Ones to Fold

Keep the oldies ... Remember, commitment counts, and lenders see long-held accounts as proof that you're the responsible citizen we know you are. So, if it's a choice between parting ways with that dashing new sliver of plastic in your wallet or the faded alumni credit card you got when you still had hair, keep the latter.

... and the goodies. If you get points, miles, cash back, or good karma from using a credit card, and -- this is important -- you actually take advantage of the goodies that come with membership, keep the card in play. It's good to know, however, that credit cards with rewards programs are pretty common. So if the card carries an annual fee, call and ask whether it can be waived. If you don't get back what you pay annually to use it, consider canceling.

Dump the flighty ones. Just because your credit boasted a single-digit interest rate when you got it, that doesn't mean it will do so indefinitely. Nothing's uglier than paying for a new transmission at a 23.9% interest rate. When it comes to those credit cards that have ever-shifting rules and rates, you have to keep an eagle eye focused on all of the leaflets you get in the mail. If you're not the type to keep your eye on the dealer, this type of card may be a lot more trouble than it's worth to keep in play.

Keep the ones that stood by you in bad times. If debt was a problem in the past and may become one in the future, keep open the accounts with which you have a decent track record -- meaning no, or at least few, bloopers, like late payments or overages -- and a long-standing relationship. If the low-interest offers dry up, your room for negotiating a better deal is best with a lender that has fond long-term memories of your time together.

Hold on to your single days. If you're married, don't give up your identity entirely. Simply being an authorized user on your sweetheart's credit cards won't help you establish credit or keep your reputation intact. You must keep at least one line of credit from your single days open and active, and in your name only. If you don't occasionally use the card, your file will go dormant and become unscoreable.
 
In addition to using the nuts and bolts of your credit card program, other factors may play a role as you review your lending relationships. Customer service is a biggie for some folks, and it's usually not an issue until something goes wrong.

The Right Way to Close a Credit Card Account

Simply cutting up the card and calling it quits doesn't count. An unused card is still an active account until expiration, so even though you might not be getting a bill in the mail, the bank still counts you as a customer. If your number gets into the wrong hands, you might not notice until it's too late.

To end your relationship with your lender for real, call the toll-free number on your card statement and find your way to a live operator. (I was only halfway joking before about the labyrinthine process. I just like to keep expectations in check.) Specify that you want the account closed -- and this is important -- "at the cardholder's request." It's a minor point, but it looks better on your credit report if the user, and not the lender, terminated the account.

Know When to Hold 'Em, Know When to Fold 'Em

Again, the level of "acceptable credit" depends on your income. Too high, and you're a risk. Too low, and your banker may wonder why you don't qualify for more. Still, with responsible credit usage -- paying your bills on time, every time -- any short-term blip will be history before you know it.

Dayana Yochim has remained faithful to her first credit card company for nearly two decades, although she admits to playing the field a few times when another bank has caught her eye.