Does Cancelling Credit Card Affect Score?

How does credit card cancellation impact the credit score of an individual?

One of the main factors defining a borrower's chances to be approved for credit facilities and loans is their credit score. One must so question whether postponing a credit card payment affects one's credit score as well. The answer is yes most of the time since, at least temporarily, canceling a credit card lowers your credit score. Usually, though, it is negligible and your score will increase after some inactive time. Here are some more specifics on how canceling a credit card affects your credit score and what steps could help to avert the worst.

The credit used on your credit record and how it affects your credit score comes next. Most likely, the factor used to determine the credit score is the way one uses credit: This contrasts the total credit limit you have access to with the degree to which you are using the credit at any one time. The consensus is that credit use should not be more than thirty percent. Your score usually declines as you approach rubbing up your allotted credit limit. This is so because terminating a credit card account lowers your credit limit overall and increases your credit utilization. Credit scores always directly drop as a result.

For example, let’s say you have two credit cards.

Credit Card A has a credit limit of $5,000 and a current balance outstanding of $2,000. Credit Card B has a credit limit of $10,000 and a current outstanding balance of $0.

Your total credit line on both cards is $15,000 and your current credit card balance is $2,000. Thus, your credit utilization rate is 13 percent ($2,000/$15,000). Now if you close Credit Card B, the total available credit is $5,000 and your total debt remains at $2,000. That means your credit utilization goes up to 40% and your score will be affected by this.

However, the magnitude of the drop is contingent upon specific factors. The effect on your credit score differs depending on your credit history, score, total credit limits, and the credit card being closed and its status. According to the general guideline of myFICO, if a person has good credit, they could lose between 10 and 30 points on their credit score when closing a credit card. But if crossing you over the 30% credit utilization ratio, the drop could be even steeper.

This is especially true for individuals who have a few credit cards opened, one or two credit cards, or even none at all. With fewer total accounts, the loss of one account is a larger percentage of the total available credit and history data used to compute the score. Therefore, the young and others with thin files would experience steep declines in scores when they compare their scores to say eight or ten active credit cards.

The Good News: The last few points are likely to go up. Although the cancellation of a card brings a negative reaction to the credit score of the individual negatively, credit score statistics reveal they recover in the long run. According to CreditCards. Com one research was conducted on people who had closed a credit card that was in good standing. Their study showed that although scores decrease by an average of 10 points after the closure of an account, the effect reduces significantly after a few months.

I was able to understand that credit scores rise swiftly in most cases after closure for a few reasons. First, the closed account remains on your credit report for up to 10 years. So while the credit limit is something you’re no longer able to access, the record of on-time payments remains increasing your score for years. Second, if you keep other credit cards active and do not misuse them, your score will improve with time. Continuous repayment in full and on time helps in establishing payment history. In addition, you should see that credit utilization ratios on the remaining cards will also improve as you continue to pay off balances.

Some of the methods that can be employed to lessen the impact of a closure on the affected firms include the following.

If you do need to cancel a credit card for financial or other reasons, there are a few things you can do to reduce the potential hit to your credit score.

• Pay down balances first: It is advisable to always make the required payments towards balances in the card for at least a couple of months before closing the account. So, your credit utilization ratios remain low even when the card limit is no longer listed among the available credits.
• Consolidate debt: Another way to ensure that there will be no drastic change in your overall credit utilization ratio is transferring the existing balance from the credit card that you have decided to close to other credit cards.
• Open a new card first: Applying and receiving a new credit card that you intend to keep active for a long time will increase your total amount of credit. By opening it before the closure, you are counterbalancing the future decrease in credit.
• Leave old accounts open: If possible, avoid closing the old credit card accounts instead keep them inactive by not canceling the accounts. You do not have to continuously make purchases on credit cards to keep them active. The information on the cards implies that as long as there is no annual fee, old accounts are good for credit history.

What is the Duration of the Negative Effects? Here’s another question that many people have in their minds how long does it take for credit scores to recover after a credit card closure? There is no standard duration because it all depends on your credit status before the closure. However, the average man or woman on the street can reasonably expect to see a great deal of improvement within 6 months to 1 year if other credit accounts are managed properly. Your credit score should then recover and can even be better off than before the closure. With the right information on how account closure impacts credit risk levels, most consumers will be in a position to avoid untoward consequences by implementing appropriate account closure measures.

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