How canceling a store card affects your credit

Are specialty store and department store cards gathering dust in your wallet? Tempted to cancel all the accounts?

Before you do, consider the impact on your credit. Canceling a large amount of unused credit could actually hurt your credit score.

If you plan on applying for an auto loan or mortgage in the next few months, hold off on shutting down the cards.

Credit-scoring models look at a number of factors when calculating your score, including the result of the following formula: The total amount of debt on credit cards and revolving accounts divided by the total amount of debt available on those accounts.

This formula results in a fraction less than one. The lower the fraction the better. A score of one would mean your outstanding debt equals your available credit and you've maxed out your cards.

Let's look at an example.

Let's say you've got $5,000 of debt and $15,000 in credit lines. By dividing 5,000 by 15,000 you get one-third. You're using one-third of the credit available to you.

Now let's say you cancel an unused credit card with a $5,000 limit. You've still got $5,000 of debt but only $10,000 in credit lines. By dividing 5,000 by 10,000 you get one-half. You're now using one-half of the credit available to you.

The closer to one this fraction gets, the more it hurts your credit score.

The best advice for a home or auto shopper with credit card debt is to hang on to all those unused credit lines until after you've landed your loan.

Folks without a penny of credit card debt can cancel as many unused card accounts as they want. As long as their credit cards are balance-free, it won't hurt their credit score a bit.

If you're in credit trouble or if you had credit problems in the past and you know an unused store card is just going to tempt you to spend, then go ahead and close the account.

Yes, it may ding your credit score a bit. But if it will keep you from acquiring more debt, it's best to do it. You can worry about building up your credit score after you're back on your feet financially.

Here's one last tip: Only cancel store cards with empty credit lines. If your balance is anything but zero, you'll want to keep the account open until you pay it off. Some issuers may try to jack up your interest rate if you try to cancel an account when you maintain a balance.