Does Closing A Credit Card Affect Credit Score?

Why Closing A Credit Card Is A Bad Idea For Your Credit?

A credit score is the numerical representation of the ability of an individual to repay the credit that is extended to them. It is employed by banks, creditors, lenders, and any other organization that wants to determine the likelihood of being paid by you. The score is beneficial since it helps borrowers to meet the requirements for loans and lower interest rates. That is why one may wish to be careful in making certain moves that would reduce the score. Some of the questions people ask include; is closing a credit card a smart move for credit repair, will closing a credit card help me to increase my credit score, or will it reduce my credit score? Below we will see how and in what specific ways this happens in more detail.

How do Credit Scores work?

Two prime sources for credit scores are FICO and Vantage scores. While the exact formulas are proprietary, we know they take into account five main categories.

Credit utilization - is whether one pays his/her bills on time. This is said to have the most significant effect on the scores.
Payment history - This is your record of how you have been handling your credit. It is important to keep this figure below 30% according to financial gurus.
Length of credit history -The number of years credit has been available to you. The more years of experience in a particular field, the more advantageous it is.
Total accounts - The total of all credit accounts you have opened or have had in the past.
Credit instruments applied - This comprises Credit cards, retail accounts, installment credit, mortgage credit,t and so on. Having a mix helps.

Does Closing a Credit Card Help or Hurt a Credit Score?

The short answer to the question is that closing a credit card does indeed negatively impact your credit score. However, the impact of these activities on your credit history depends on the individual credit record and the chosen scoring model. In most instances, the reduction is slight but there are occasions when it can be significant for certain individuals.

There are a few reasons why closing an account can reduce your score.

Less Experience in Credit History

If you close a card, then you are canceling a part of your credit history, to a certain extent. This reduces the average length of time you have had credit access. This is very significant if your oldest card is closed because the credit utilization ratio is affected.

Higher Credit Utilization

One more important aspect to consider is that when an account is closed, it means that the total amount of credit is less. This implies that your credit utilization ratio increases if your balances remain unchanged. For instance, if you hold two cards with a credit limit of $5,000 each, the total credit available to you is $10,000. If you spend 2000 on one card your ratio is 2000/10000 or 20 percent. But if you close one card your ratio drops to 2000/5000 or 40 percent. This can reduce your scores.

Fewer Total Accounts

Credit scoring models usually reward consumers who can manage several accounts simultaneously. Another disadvantage of closing a card is that it decreases the number of open accounts, and if there are very few or none at all, it will be detrimental to your scores.

Some advice for minimizing potential credit score harm when closing an account.

If you have determined it is in your best interest financially to close a credit card, here are some tips to help minimize score damage.

This requires that you clear your credit card balances before you consider investing in other ventures. One should minimize credit utilization on all cards before an account is closed.
Keep old accounts active. It is advisable to keep the first credit card open at all costs since this records the longest credit history.
Space out closures. Do not cancel many cards at the same time. These closures should be given some time between them.
Maintain other credit. It is wise to have a reasonable number of other open credit lines such as installment credits or home loan credit.
Check scores after. It is also recommended to check your scores several months after the closure to determine whether some of them have become negative and require correction.
Request an increase in the credit limit. For other cards, request for higher credit limits to ensure that the rate of utilization is not high.

The Difference Between Closing An Old Card And A New One

As mentioned earlier, the effect that closing your oldest credit card has is the most profound impact on credit scores. This is because the longevity of credit history is a major blow. You also lose the available credit of the highest limit card because issuers offer high credit limits to loyal customers.

For instance, closing a newer credit card that one has held for less than a year or even just a few months has little implications when it comes to the length of credit history and utilization. When you close a new card, you may not see much or any drop in scores.

How Long is the negative impact of account closure felt in the organization?

Some credit scoring factors update in real-time when you close an account. Thus, your total accounts, length of history, and utilization ratios are updated instantly. In many instances, what this means is that schools would record a drop in their scores that very same month as the examinations.

Closing that particular credit has an impact on the duration one uses other credit responsibly as the scores start to rise. But the effects can linger for years, which is not very good news for those who suffer from this disorder. The time taken to recover depends on the extent of the closed card on your overall credit usage. For instance, if the card was only a year old, the scores might recover within 6-12 months. However, if it was your first ever credit card with a high credit limit, then it may take up to two to three years for the closure to have an equivalent effect on your credit score.

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