Can Closing A Credit Card Affect Credit Score?

Effects of Closing a Credit Card Account on Your Credit Rating

Consumers now and then wonder if they should close a credit card account. Still one of the most often utilized financial instruments in the United States of America is credit cards. One may opt to obtain or cancel a credit card for many different reasons. Furthermore influencing the decision-making process should be the knowledge that credit score might be influenced.

Closing a credit card account: How does it affect you and your credit score?

This is important to note since many people think that closing a credit card account will erase their history altogether. This account stays on your credit report for 10 years from the date of closing. However, account closure can affect several primary credit score components.

Many factors are taken into consideration when computing your score, including how long your credit history is and your utilization ratio. This can be bad because closing a card reduces the total credit history and raises the credit utilization ratio. Both actions are generally inclined to reduce credit scores.

The Effect on Credit History Duration

The length of the credit history that you have is equivalent to 15 percent of the FICO credit score computation. In general, it is always better to have a positive credit history as long as possible. Younger people initiate their credit records by setting up their first credit accounts in their late teenage years or their early twenties.

That is why it is inadvisable to close your oldest credit card account since this will lower the average credit history. For instance, if you got your first credit card at the age of 18, you are likely to be 25 years old now. Closing that card alters your credit history length from seven years to just two or three years. This sharp decline can decrease your scores.

Why the Utilization Ratio Matters

The credit use ratio is a comparison of your credit card debt to your whole credit score. The experts advise it should not be more than thirty percent. The optimal situation is when this ratio is less than one.

For instance, your total credit limit is three thousand if you have three credit cards with a one thousand credit limit per. Your credit use is 17% ($500/$3000) if right now you owe $500 with the three cards taken combined.

Closing one of the accounts lowers the whole possible credit limit to $2,000, but the amount stays at $500. Your credit use now comes at 25 percent. The rise in the percentage might cause your credit ratings to drop.

Other Impacts to Consider

Another disadvantage of closing your oldest credit card account is that it affects the credit mix. Creditors want proof that you can handle various forms of credit without defaulting. Revolving (credit cards) and installment (car loans, mortgages) credit helps to diversify your credit.

Lastly, when you ignore an inactive credit card account, you lose the line of credit. In addition to this, even if you do not have balances, lenders are comfortable in extending other forms of credit if you have credit limits readily available.

Considering the Pros and Cons of Cutting Up a Credit Card

Considering the mentioned disadvantages, you might have asked yourself a question if it is ever possible to close a credit card. They both apply when it comes to making the decision; like with most things to do with money.

Here are some reasons you may choose to close an account.

It makes you spend more than you should with the credit extended to you. Some consumers experience a shortfall in self-control as far as spending is concerned. To them, it erases the option for the evils of the night to get a hold of temptation by closing accounts.
You want to reduce the complexity of your finances. If you have several credit cards and have problems with due dates, balances, and reward programs, it is useful to combine your financial products.
An annual fee does not suit the business anymore. If you are not using the travel rewards card frequently enough that the annual fee is worth it, then it may be more financially responsible to apply a halt to the card.
You open a joint account. If you have an authorized user on your account, you may choose to shut down one particular credit card.

Potential Strategies for Avoiding Credit Card Closings

This is going to be more harmful to some consumers than it will be helpful to close an account. What alternatives exist? There are several intermediary actions you can take before the closing of an account.

Do not use the card anymore but retain it active. You keep the credit and credit history you have and do not accrue any more debt than what you have available.
Request the issuer to reduce the credit limit if it is still high from the current requirements. Reducing the amount of credit you utilize also helps to reduce your utilization ratio.
Ask to switch your card to one that better fits your needs and has better rewards than imposing an annual fee. Some providers let you transfer proprietary cards to a no-fee rewards version.
Try to find out if you can transform a credit card revolving account into an installment account. Unfortunately, only some credit unions make this option available. It helps to have a credit mix and at the same time, it does not harm the length of credit history.

Monitor Your Credit Reports

When you close any credit account, it is advisable to review your credit reports from Equifax, Experian, and TransUnion. Check for mistakes or scams. And of course, pay attention to fluctuations in your credit score as well. Certain scoring models are more sensitive to accounts’ closure than others. If the scores drastically change over time after closing a card, then they will reconsider it.

The Bottom Line

Those consumers who have a long credit history should be very careful while eliminating their credit accounts that have been opened for many years. It is therefore important to have a good credit history and to keep this going for a very long time. But, of course, every financial planning is rather unique. One should also carefully weigh the advantages and disadvantages of closing a credit card account before opting to do so. Maintain sound credit and keep track of your FICO or VantageScore rating or your credit reports. This helps you to be in a position to make the right decisions as regards your financial responsibilities.

Ready to boost your credit score? Call +1 888-804-0104 now for the best credit repair services near you! Our expert team is here to help you achieve financial freedom and improve your credit. Don't wait—get started today!