Does Closing An Account Affect Credit Score?

Is Closing an Account Good or Bad for Credit Score?

Credit score, therefore, is one of the most significant elements that define the availability of loans and credit cards. It also enables the lenders to know how well or otherwise you have repaid your debts in the past and therefore how capable you are of repaying the debts. Most consumers are right to be concerned that some financial activities such as account closure may be detrimental to credit scores. In this article, we will examine the various possibilities and their impact on credit scores and access to credit – is it possible to close a credit card or a bank account?

How the Credit Scores are Determined

Let us first review what constitutes your credit score before we discuss how account closures affect it. Standard numerical ratings and credit scores are found in FICO ratings ranging between 300 and 850. A borrower presents better to a lender or any other financial organization the higher their score. FICO scores are computed using the following elements.

Payment history: 35 percent—that is, if you pay your bills on schedule. Thirty percent is your total debt load—that is, what you owe now about your credit limit. Credit history length—that is, the length of time you have been able to access credit: 15 percent Mix of credit kinds: 10% whether you have expertise with loans and credit cards among other forms of credit. Inquiries and fresh credit applications: ten percent

The above-listed elements clearly show that the finest reputation for timely debt payment gets the most weight. Your score is largely influenced by your credit mix, credit history length, and present debt levels.

Closing Credit Card Accounts

The credit score effect of closing a credit card account is as follows; Credit score affect reaction two; Credit score affect reaction one; Credit score effect of closing a credit card account; The credit score effects of closing a credit card account are as follows; First, it can reduce your credit limit. And second, it reduces the period on your credit report.

Reducing Your Available Credit

Since the credit utilization ratio makes up 30% of your score, reducing the total credit limit would consequently raise your credit utilization ratio. For instance, if you have $2000 outstanding on credit cards with a combined limit of $10000, your utilization rate is at 20%. If you have a card that has a limit of $3,000, then your total credit will be $7,000 if you decide to close the card. Although your outstanding balance was not increased, now $2,000 is more than 28% of your credit limit – and your credit score will be affected accordingly.

It is especially felt if closing an account can result in your credit utilization going above 30%. But even if you improve from 20% to 28% of utilization it is enough to drop several points. The effect also declines with time as long as the remaining accounts remain healthy as you continue to accumulate your funds.

Shortening Credit History

One possible disadvantage of closing your oldest credit card account is the fact that this will decrease the overall average credit history, as card opening dates are included in the average. Even if your oldest credit record is 15 years old, but the next oldest is only 5 years, closing that first account greatly reduces the total history length. This factor makes up 15% of your FICO score.

In general, you should keep your oldest accounts open because closing them significantly affects the length of your credit history. It is also important not to close any credit account that is among the first credit accounts that were ever established.

Other Credit Score Impacts

Closing an account could also lead to these other consequences.

Higher interest rates on new credit accounts in case your credit score drops You stand to lose your credit card rewards in case you close your rewards credit card The inability of cardholders to enter into 0 introductory interest credit card balance transfer offers in case of depending on these introductory rates.

There are several potential score benefits that an organization may stand to gain from closing an account.

However, there are a few circumstances when account closure does not harm your credit score or even helps a little.

However, if you close a relatively recent account that you have opened recently but not one of the oldest, the impact on the length of your credit history will hardly be felt. The only thing that you should be careful with is that taking multiple credit inquiries within a short period after opening an account and then closing it shortly after is not very advisable. A large number of inquiries and new accounts also lower your score.

Moreover, if removing an account allows one to make further progress in reducing your credit utilization, say, transitioning from 90% overall utilization below 30%, then, the benefits of lower utilization will compensate for the drawbacks of having a lower total credit limit and longer credit history. The only caution that should be taken is that credit card holders should ensure that they will not be tempted to make high purchases that will lead to high balances in the future on unused credit cards.

Lastly, if you have an account that you are worried you might miss future payments on due to high balances, interest rates, or fees, potentially defaulting or falling behind on payments would hit your score much worse than merely closing that problematic account. Close such accounts to prevent credit damage due to missed payments and remain with less risky accounts until such a time when one can make the necessary improvements to keep all the accounts in good standing.

Analyzing the Potential Benefits and Costs of Account Termination

When considering whether to shut an account or a credit card, it’s important to think about how long that account has been active compared to the accounts still open, the consequences that would lower a total credit limit have on one’s credit utilization ratio, and whether having the account open has potential risks of missing payments. Do not close very old accounts and realize that even closing relatively new accounts is detrimental to your credit score at least in the short term. Do not apply for a big loan or credit card, or make multiple inquiries, before closing your accounts or transferring your balances. With this context, you will be in a position to make the right decision of whether to close a bank or credit card account depending on your circumstances.

This includes the main aspects related to how account closings impact key credit score elements. Other credit scoring questions? Feel free to share with us in the comments section!

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