Does Cancelling A Credit Card Affect Your Score?
Is Cancelling A Credit Card Harmful To My Credit Score?
A credit score is a very important aspect of your financial life. It affects lending rates, rental applications, and much more. Not surprisingly, many consumers are left wondering whether or not they are damaging their credit by closing a credit card account. The short answer is yes, cancelling a credit card is likely to harm your credit score in most cases. However, the severity of the damage varies depending on your credit profile.
The specifics and mechanics of credit scores will be discussed in this post; why canceling accounts damages scores; the degree of the damage; and steps you should follow should you have to close a card you no longer use.
Simply said, credit usage is the total amount of your credit line either now or in previous use.
Credit scores are produced using the data shown on credit reports. The most often used models, the FICO and Vantage Score systems both include five main criteria.
- Payment history
- Credit utilization
- Credit age and mix of credit.
- Seeks new credit
- Credit history length
The second ratio is credit utilization, which shows your relative use of available revolving credit. Revolving credit consists of credit cards, lines of credit, and any account where credit can be reused by the borrower up to an agreed amount. Both FICO and VantageScore use a high balance to your limits as a sign of credit risk. Therefore, your utilization has a strong bearing on your results.
One rule of thumb is the utilization rate of each card should not exceed 30 percent of the total credit line for that particular card. But even lower is better when it comes to your scores. In an ideal world, the total utilization for all revolving accounts must be 10% or below.
When you close a credit card, you eliminate that credit limit and decrease the total credit available that is used in the calculation of the utilization ratio. Depending on the circumstances, it can drive your credit utilization through the roof and pull down your scores.
How Much Does Closing an Account Affect Your Credit?
A common concern among consumers is that closing their oldest credit card will demolish their credit. It may not be as terrible as you would expect, although, of course, it is not helpful in any way. The credit scoring models do not give too much weight to credit tenure and the length of time that you have been using credit has very little effect on most people's credit scores.
But, if you are not very old, closing the oldest one could decrease credit tenure enough to pull down the scores. This group of people must avoid closing accounts they no longer use especially those that are old. New credit bureau data shows that the average credit history in the United States has been around 8-10 years.
Even if you are closing a credit card, your score is not going to drop extremely low if you are not eliminating a significant part of your overall credit limits or if the card is the oldest one and your credit history is not so long. It means that instead of experiencing a huge point drop, you should be ready for a moderate effect. For example, an individual with good credit and a healthy credit history might experience their scores falling by 10 to 30 points for closing one unused credit card.
The impact will be even more significant if you discharge many accounts within a given period. Credit scoring models do not like to see consumers closing several accounts at one time. If you do need to cancel several cards, close them throughout a couple of months to make an impact on the score.
The following is a list of strategies to ensure that one does not have a negative credit history when closing an account:
It just makes sense to cancel the credit card if you have one that you don't use and incurs some amount in annual fees. However, it doesn't mean that you have to lose money or your credit rating in the process. Here are some strategies that allow you to avoid credit fallout when closing accounts.
Lower Balances First Again if you have balances on your cards that are high then paying for them shall reduce your credit utilization first. Avoid having high balances in these accounts by ensuring they are kept below 30% before proceeding to close the account.
Try Opening A New Card First When you apply for new credit, your scores are going to be reduced slightly, no matter the outcome. However, if you open a new card first the above total limits can help to offset the loss you have planned above. The only thing you should ensure is that you do not get into the habit of charging items on the card just to earn the rewards.
Upgrade With the Same Issuer Check if the credit card issuer has any option of transferring to a new credit card with better terms. This can make it possible for you to end the old and unwanted card but retain your account history with the bank. This does not tarnish one's credit and the bank is also pleased with it.
Choose Cards Carefully You should review all of your credit cards roughly every twelve months to compare interest rates and costs of ownership. Label all the unused cards with expensive annual fees as candidates for closure, starting with cards with the highest fees or the latest open dates. Where possible, do not shut down old cards and the first/primary usage card accounts.
Yes, closing a credit card does have an impact on the credit score although in most instances the impact is usually negative. The effects vary from marginal to significant based on how it alters your credit utilization, history length, or other credit factors. If you're to close any accounts, be sure to do so in a strategic manner. Still, it is good to take some preventive measures, as illustrated here, to ensure that your credit score is not significantly affected by credit card cancellation.
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