Does Closing Accounts Affect Credit Score?

Does closing accounts reduce credit score?

The credit score is an important rating that determines your credibility to borrow or be given loans or credit cards. Credit scores are important to lenders as they provide insight into how competent one is in honoring borrowing obligations. It is common to ask if it is possible to change the credit score by closing credit card accounts or any other credit such as loans. The following article will then discuss the effect of account closures on your credit.

The Short Answer

In most cases, closing an account will not be favorable for your credit rating and may worsen in some circumstances. But there are some situations where it is reasonable to close an account for your benefit without causing much credit. The effect depends on your credit portfolio the number of accounts that you have, the age of your credit file, and the rate of utilization.

Why Closing Accounts Can Be Dangerous for Your Credit?

A good number of aspects of credit scoring relate to the period of your credit history. They have also reduced the average age of accounts which is detrimental to credit history since closing an account shortens the overall length of credit history. Since lenders want to note a long history of proper borrowing behavior, this factor can lead to a drop in your score.

The second way through which closing a card negatively impacts your score is its relation to your credit utilization. This is the actual amount of credit card outstanding balances you have to the total amount of credit limit. It is suggested that this ratio should not go beyond 30 percent. If you close an account it reduces the total credit limit available to you. Depending on your circumstances, this would raise your credit utilization rate, thus making it appear as though you rely more on the remaining credit.

Effects of Closing Different Account Types

It is important to note that not all account closures hurt credit. Here is how closing different account types impacts your score.

Credit Cards You are right that closing an old credit card can reduce your credit score if you do not have other credit accounts that are of older standing. Closing newer cards even can have a very slight negative impact on your credit score. Moreover, if the closed card was a high-limit card, it could have adversely affected your credit utilization ratio. But if you have other credit accounts active, chances are closing one will not be harmful to your credit.

Installment Loans This is because installment credit products such as an auto loan and a mortgage loan are managed differently from revolving credit such as the card. This means that closing an installment loan does not affect the score as much as closing a credit card. However, it can also reduce your credit history length and your credit mix.

Collections Accounts Thus, when you pay off your collections account, it is okay to close it as this does not harm your credit score in any way. As defaults and collections negatively impact credit scores, paying off the debt and closing the account eliminate the credit score concern. That is okay so long as the collection agency is reporting the account to the credit bureaus as paid.

When Closing Accounts Makes Sense?

That is why, as a rule, it is more advantageous to retain the accounts; however, there are cases when the account closing is useful or obligatory.

If you have an account that you do not frequently use and it has expensive annual fees, cancellation can help you save money without messing up your credit if you have other good old accounts. This is not financially wise to pay ongoing fees for credit that is not in use. Finally, before closing the account, it may be wise to switch to a lower-fee card instead of shutting down the account in question.

It is still advised to close a newer credit card with a short credit history and limited credit limit because it will not offset the advantages of maintaining the primary credit accounts. Sometimes, people tend to hold on to an unimportant card just to make their credit record longer which is not good. Watch how this cancellation affects your scores and credit factors.

It is necessary to close the accounts that have been exposed to risks once you notice that they are involved in such activities. A victim of identity theft can experience severe financial losses if the issue is not addressed. Although credit damage from closures due to fraud is likely to be reversible soon after fraud is detected, the primary goal in these cases is to safeguard one’s money and identity.

Strategies for Reducing the Impact on Credit Score When Closing Accounts

If closing an account makes practical sense for your situation, use these tips to help minimize resulting credit score damage.

• First, reduce the balance of the account you wish to close to control credit utilization effects
• Next, it is recommended to apply for new credit or request an increase in credit limit on existing accounts to help offset the reduction in total available credit.
• Next, one should consider moving higher balances from the card with a maxed-out limit to the account that the customer intends to close.
• Last but not least, ensure the account is closed and verify that there are no negative statuses reflected in your credit reports.
• It will allow some time for such changes to reflect on your credit reports before going back to apply for credit.

The Bottom Line

In deciding whether or not to close a credit account, the most pivotal query is whether the value of keeping the account open is greater than membership fees or security concerns. Although closing accounts may harm or benefit your credit standing, it is more useful in the long run to keep good financial status, have savings, and safeguard personal information. Do not shut several accounts at once as this can affect scores without adequate preparations being made. But there are times when closing accounts responsibly and strategically is good for your financial position.

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