Does Closing Credit Card Affect Score?
Is Closing a Credit Card Harmful to Your Credit Rating?
Since it defines your creditworthiness, your financial life depends critically on your credit score. It affects everything, including loan interest rates and insurance premiums as well as your capacity to lease an apartment or register for a mobile phone contract. People so get driven to find out how each given activity they may do will influence their credit score. Another often-asked question is if closing credit cards affects credit scores in any kind. The quick response would be: sure, terminating a credit card account may lower your credit score in certain specific situations depending on no other activity. Still, the influence of each of these elements relies on the following few criteria.
Another phrase used in synonym with credit rating is credit score.
One should first keep in mind what a credit score represents. Usually falling between 300 and 850, a credit score is a three-digit numerical depiction of your creditworthiness or capacity to pay back the debt on schedule. The FICO credit scores and the VantageScore credit scores are the two main two varieties of credit scores. Lenders utilize it as one of the foundations for their credit record, income, and other factors-based choice to provide credit including credit cards, auto loans, and mortgages. If it passes your application, they also regularly take your credit score into account to determine what interest rates it should provide you. Higher credit scores suggest that the clients who have them would get better conditions of credit from the lenders. This is maybe why, should your score decline, you discover that credit cards provided to you draw greater interest rates and maybe you won't be able to obtain credit goods going forward.
Why can closing a card hurt your credit?
When you close a credit card account, it can impact two important factors in your credit score: your credit utilization ratio and credit card account history. Now let’s discuss both of these factors in more detail.
Effect on Credit Utilization Ratio
The credit utilization comprises 30 percent of your credit score, so it is important to maintain a healthy balance. This compares the current balance you have on all the credit cards with the total credit limit that is granted to you. To calculate it, you divide your total balances across all the cards by your total credit limits. For instance, if you have $2000 in total balances on 3 credit cards and your credit limits for those cards are $15000, your credit utilization ratio will be 13%.
That is why in general it is considered as optimal to have as low a credit utilization ratio as possible. It is important to never use more than 30 percent of your available credit, although the lower the number, the better. However, as you approach the limit of your credit utilization, your credit score drops since this makes you look such a high risk to the credit facilities’ providers. When you cancel a credit card account, it often lowers the overall credit limit that you have. Therefore, even if you retain the same balance, closing an account raises your credit utilization rate. That is why closing a card can reduce your credit rating.
Impact on Credit History
However, it is also important to note that closing a credit card account will also decrease your credit history or length of credit history. About 15 percent of your overall score depends on the history of your credit accounts, including things like.
- How long you have had credit accounts
- The last time that you applied and were approved for a new credit account
- When was the last time you logged in to specific profiles
This is because when you close a credit card, you are reducing the credit utilization history which contributes slightly to your score. The more time you have been properly handling credit accounts, the more it is favorable for your credit score.
If you close your oldest credit card account, your score will again decrease because you have now reduced the average age of all the credit accounts. This is why it is generally advised not to shut the first or the oldest credit card if there are no annual fees to be paid. It is still useful to remain active even if not frequently by preserving the length of your history.
Closing an account whether willingly or unwillingly always brings a negative impact on the credit score of an individual but all is not lost as there are ways how one can minimize the score damage done.
If you've determined it still makes good financial sense to close an existing credit card account, there are a few things you can do to minimize damage to your credit score.
Pay down balances first. It is wise to reduce balances on the other credit cards before considering closing an account, if possible. Like that, your credit utilization ratio looks better.
Leave old accounts open. Do not cancel your first credit card or the credit card which you have held for the longest time. These aid in highlighting creditworthiness and a good payment history.
Consolidate credit limits. Before closing a card, you may be able to contact other credit card companies and request an increased limit. Then your total available credit is still higher after the account is closed.
It is for this reason that one should allow time for changes to be made to the post. Be certain to fulfill the payment responsibilities up to the account closure date and allow at least one billing cycle for the changes to reflect before applying for credit.
Monitor your credit report. After the account closure posts, the credit report should be obtained free of charge several months later to edit mistakes. Also, consider credit monitoring.
Do not open many new cards once the accounts have been closed. Do not apply for several new credit cards at once. New inquiries together with lesser history may cause additional score decreases.
What Is The Lowest A Credit Score Can Go?
It is also important to note that closing a credit card results in relatively minor reductions of a few points and not massive 50+ point drops. The effect is normally only a temporary drop in credit score, assuming that good credit practices such as paying all bills on time are maintained. However, the exact impact does depend on your situation, including.
- The number of credit card accounts that are currently available to you
- The fact that the account is closed and has been inactive for a long time
- The current credit card balances and whether it increases after closure
- Your credit record shows that you have always paid your bills on time.
- Any new accounts or inquiries related to your credit file
Credit score 2: For most people who have credit scores above 740, any addition or closure of an old credit card account will not significantly affect them. However, if you have a low credit score you have no credit history or if you are struggling to regain a good credit score, even small fluctuations can be detrimental to the loan agreement. That is why, it is equally important to at least, monitor your score and report for a few months after closing an account. It enables you to resolve and dispute matters without escalating them as they would if not intervened.
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