Getting Hurt By Tough Credit Terms? Canceling Credit Cards Can Hurt Worse

Credit card companies have been changing their credit card terms a lot in the past few months. A lot of these credit term changes were made in preparation for the upcoming Credit CARD Act, a new legislation signed on May of 2009 aimed at protecting consumers from abusive credit card company and bank practices. Curiously, few of the credit terms card companies have been making which were triggered by this new legislation have been very friendly to consumers.

In the past few months, card holders have seen their interest rates hiked to as high as 33% and even higher. Credit limits have also been cut down severely, even for those with good standing. Rewards have also been cut in half. Followers of frequent flyer mile programs have also had fees added on for their participation in the program. Card companies have even cut a few card holders’ credit lines without warning, only offering explanations after the fact.

For consumers who have been on the receiving end of these recent practices of card companies, it can be quite tempting to just cancel their credit cards altogether, at least the offending ones. A lot of consumers have apparently made the jump to do so, considering the decrease in card usage and the uptick in cash and debit card payments during the last holiday season. Still, for consumers who want to get rid of their cards, there are some painful consequences that they ought to consider first.

A lot of the pain that comes from canceling a credit card has to do with the resulting effect it will have on a card holder’s credit score. Most American consumers know the importance of their credit score. A consumer’s score is a measure of how good of a borrower he or she is. A low score means a tougher time for them to secure loans, and even if they do get a loan, they will usually get a not so advantageous set of terms.

When a consumer cancels a credit card one of the worst things that will happen is that their available credit is reduced. The ratio between a consumer’s debt and his or her available credit is one of the major numbers that credit scoring agencies look at. A drop in available credit definitely puts a negative mark on a consumer’s credit score as it raises their debt to credit ratio.

Another problem is if a consumer cancels an old card line. Credit history makes up for a large part of a consumer’s credit score. If a consumer cancels an old credit card line, then he or she gets hit by another deduction in his or her score.