How Does Cancelling Credit Cards Affect Your Credit Score?

How Does Cancelling Credit Cards Affect Your Credit Score?

Another thing that can hurt your credit score is closing or canceling a credit card account you own. But, the impact of canceling a credit card on your score depends on several factors. This article will describe how credit card closure affects credit score and under what circumstances is beneficial to do it.

What happens when you close a credit card?

Should you decide to block your credit card, the credit card company will forward this information to three top credit reporting agencies: Equifax, Experian, and TransUnion. Still, the credit card account will show "Closed" on your credit report even though it will stay visible.

Although the closed account will show up on your credit record and might be taken into consideration when computing your credit score for up to ten years. But as time goes on, the impact on your credit score will progressively decrease. Your credit score suffers more from an account closed under closed credit than from an account closed after a few years.

How Does It Affect Our Understanding of the Concept of Utilization Ratio?

This is often considered one of the most important factors that define your credit score. This determines the extent to which you are indebted about your credit limit. It is advised that you keep the percentage of your utilization below 30%.

Closing a credit card particularly one with a high credit limit can in one way lead to an increase in your credit utilization if you hold balances on other cards. For instance, if you have a card with a 10000 dollar limit and you transfer a 5000 dollar balance to another card that also has a limit of 5000 dollars, then you will default to paying 100% on the remaining card. This leads to a higher ratio, which may highly bring down your score.

The Length of Your Credit Histories

The average age of your credit accounts also contributes to your credit score formula as indicated earlier. The more years of credit experience you have the more positive information the credit bureaus have to use in assessing the risk. If your oldest credit card is active, closing it will reduce the average age of your accounts and potentially lower your score by points.

For instance, if you cancel the first credit card, which you got during college and was issued 15 years ago, but keep other cards with a 3-year credit history, the overall credit history in the eyes of the credit bureau will be closer to 3 years. This reduction in your total history hurts your score.

Open Credit Cards Holders

Distribution of credit also plays a role in determining the credit score. It is recommended to have 3-5 revolving credit accounts that are reported as paid in full and on time to demonstrate the ability to manage multiple types of credit accounts properly. It is also important not to close too many cards as it may reduce the overall number of open accounts and in turn affect this aspect of the score.

However, this is not always the case because when a credit card holder opens several cards, it can be disadvantageous at times. This makes it appear as if you are using too much credit which is available to you and this can be dangerous if a lender feels that you cannot handle it properly. Generally speaking, it is not necessary to maintain unused store credit cards and keep them active for eternity when other types of credit have been built.

Understanding When It Is Appropriate to Close a Credit Card.

Although the first closing of a card may lower credit for a certain period, one needs to understand that there are instances when the action is beneficial. Here are some instances when closing an open credit card account will have little or no effect on your credit score: Here are some instances when closing an open credit card account will have little or no effect on your credit score:

You have several other active cards. If you have several credit cards that are active and you pay your bills monthly, then closing one old card you have would not have a significant impact on the state of your credit. Your credit mix is already diverse and lengthy, and your utilization remains low on other cards. But do not keep only one card open because this may also be bad since you may be using up to the maximum of your available credit on this one card.

On the same note, there is an annual fee. Some credit cards – particularly rewards cards or cards for those establishing credit – come with prohibitively high annual fees that may not be offset by the value of the card further down the line. Having a card that you no longer need or use with a high annual fee means that you are constantly parting with your hard-earned cash. Still, ensure that you close these cards only when you have created other favorable credit records.

It has a short credit history The fourth attribute of credit risk is that it has a short credit history. You do not need to close a credit card that you have been using for a few months or years because this account is relatively new and does not contribute to your credit reports yet. It is generally always advisable to have cards that are at least two years old before considering cancellation due to the age factor. Moreover, new cards have low credit limits which means that closing these does not significantly affect the utilizing ratio.

You What? You Accidentally Clicked It On some occasions, it is even worse to apply for and receive a credit card that you do not need or intend to use frequently. Even credit inquiries from applying for such unwanted cards or accounts will also bring down your score for some time. If you find within a short time after approval that you opened a card that will not be beneficial to you, it is wiser to close it before using it. An inactive card that you have never used will not help or harm your credit profile if it is closed shortly.

Other Options That Exist Instead of Closing a Credit Card

If you have a card that charges you an annual fee and you want to retain your credit mix and history, then do not close the account. Instead of closing it, you can talk to the company that issued the card and request to have it changed to a card that does not charge an annual fee. Another option you can take is converting an inactive card into an emergency card, which you use sparingly as opposed to canceling the card. This helps to maintain the average age of credit thus you do not have to use the card every month to maintain its active status.

It is important to note what steps can be taken to rebuild credit after closing a credit card.

While canceling a card may lead to a reduction of your credit score, you should note that this is only for a short time if you continue to use your credit card properly. For most individuals, their credit score can easily regain a normal position within a few months of closing an account. To avoid negative effects, one should maintain low balances on other cards and refrain from applying for new credit during this period.

The last is maintaining the absence of any further score deterioration by paying all credit obligations on time every month. One way of ensuring that these payments are made on time is to have them set as automatic payments. It also helps you keep track of your progress in recovering from credit closures when you regularly monitor your credit with free annual reports.

Ready to boost your credit score? Call +1 888-804-0104 now for the best credit repair services near you! Our expert team is here to help you achieve financial freedom and improve your credit. Don't wait—get started today!