What Impact Does Closing Credit Cards Have On Your Credit Score?
Establishing a favorable credit score is essential especially for people who frequently avail of various forms of credit. A good credit score is considered by most lending and banking institutions as a positive sign of being able to manage your finances well and made as a major basis in their decision to approve loan applications. It is, therefore, vital to maintain a high score and avoid taking drastic actions that could lower it.
One action that could hurt your overall credit score is closing credit card accounts. Closing a card affects two parts of the credit score calculation – the level of debt and the length of credit history. Understand then that doing this will lower your credit score especially when your credit card account still has a balance and when it has available credit while your other credit cards don’t. Additionally, you credit score will be badly affected when you close your oldest credit card and when you have no other credit cards or loans to use.
There’s another misconception on this aspect that closing a card, notably an old one, eliminates the history. The truth is that you can always close an account you haven’t used for years and the history of that account, no matter how long, has a good chance of still being included in your credit report and credit score calculation. If you have a long history of on-time payments on that card and you close it, that positive history will remain on your report.
When closing a credit card, experts advise consumers to assess their situation. Ask yourself if closing the account will affect your total available credit compared to the balances you carry on your card. Keep in mind that although you may pay your balances off each month, the average amount left in your card during the month is still considered a credit. If you use most of your available credit even for just a short time, it still impacts negatively on your credit score.
A good thing to do when closing one account is to ask your other credit card company to increase the credit limit on your other card to compensate for the loss of that available credit. With this, you still have the same ratio of debt to available credit but you have now fewer cards.
For people who own several credit cards, closing one account won’t matter much but it helps. Each individual has a good reason to close an account and one of it is to avoid risks. A potential risk faced by all cardholders is identity theft. Credit cards and account numbers can be stolen and used without your knowledge and cards that are unused are in more danger of misuse than those regularly used.
What’s important to remember here is that negative information will surely hurt your credit score while positive behavior patterns over time will raise your score. And if you maintain the positive habits, your credit score will less likely to fluctuate. So if you’re one of those considering important financial actions such as applying for a mortgage or other loans, be extra careful in making decisions concerning your finances to maintain a good credit score.
