If you have credit cards you are not planning on using any more, your first thought may be to cancel the account or cut them up. There are some things to know before cutting up credit cards.
There is a difference between cancelling a credit card account and cutting up a credit card. When you cancel the account, you are no longer able to make charges on that account. If you cut up the credit card, you may still be able to charge expenses to it if you still have the account number written someplace or stored on an online account from a previous purchase.
An important thing to keep in mind before cancelling a number of credit cards is that it can have a major affect on your credit score. A part of your credit score is based on the ratio between the available credit you have and how much you have in outstanding balances on your credit card accounts. If you cut up or cancel a number of cards at one time, then this would lower that credit utilization ratio and your credit score could drop drastically. You may think it would help your credit score because it shows responsibility and discipline by cutting your available credit, but it sometimes tends to have the opposite effect.
Proper credit management is especially important if you are planning on applying for a home mortgage or other financing in the near future. The drop in your credit score from cancelling to many credit accounts has the potential to negatively impact the interest rates you are eligible for; in some cases, no longer qualifying for a loan may result from mismaning credit card accounts.
Another factor to your credit score is the length you have had accounts open. It is better to keep accounts open that you have had for several years. It will show your payment history over the years. Even if you close an account or cut up a credit card, your credit history will still show your late payment history. By keeping the account open and making your payments on time, this will help improve your credit score over time.
If you do decide to cut up your credit cards, make sure you do it correctly to protect yourself from identity theft. Some suggestions are to cut horizontally across the account numbers, remove the security code on the back of the card from the rest of the numbers and dispose of the pieces in separate bags so it is more difficult to piece them back together.
If you are cutting up the credit cards to remove the temptation of overspending it is more important to understand why you are overspending and make changes to stay on budget. It will he healthier for your credit score if you can adjust your spending instead of closing the accounts. Develop a monthly budget of how much you have coming in each month and determine your spending and saving based on that amount.
There are some things to consider before cutting up a credit card you are no longer planning on using. Closing the account or cutting up the cards can have an effect on your credit score.