How Does Closing A Credit Card Affect Credit Score?

Now and again, people face the dilemma of how to manage credit and specifically whether or not closing a particular credit card will be good for their credit. Since credit is much valued today as security for loans, rentals, mortgages, and other facilities, it is a justified worry. Here is a breakdown of some of the major ways through which the closure of an account impacts your present credit score and rating.

The Main Factors

First, it helps to understand that a FICO credit score, which is the most commonly used metric, is calculated based on five main factors.

Credit history is payment records to determine whether or not the individual has been paying his or her bills and other obligations on time. This category contributes thirty-five percent to the total score.
Credit utilization - Evaluate the proportion of total credit that is offered and the amount of credit that is in use. Makes up thirty percent.
The average age of accounts - Calculates the average age of credit accounts opened till the date of analysis. Fifteen percent.
Open and active - The total number of credit card and loan accounts that are currently available to consumers. Ten percent.
New accounts – new credit accounts in the period. Ten percent.

In case an account is closed, it is seen that certain of these areas are affected more than others are. The following are the three main ways credit can change.

Credit Utilization Ratio

This means the proportion of credits outstanding to the total credit limit. However, it is advisable to ensure that this ratio is below thirty percent in most cases. When an account is closed, the total credit available reduces, thereby increasing the ratio above. This may reduce a credit score significantly if the card has a large credit limit.

For instance, where a person has two credit cards – one with a credit limit of 10, 000 and a balance of 500 dollars, the second card with a limit of 20, 000 and a balance of 15, 000 dollars. The total amount of credit used is forty percent out of the total available credit of thirty thousand. If they shut the twenty thousand card, total consumption rises to fifty percent, and therefore their rating declines.

Length of Credit History

Regardless of its active state, an account remains to be included in the overall length of credit history of most standard scoring models once the account is closed. However, as new accounts are opened in the future, the closed account gradually assumes a proportionately smaller portion of the total record, which can reduce the average length over time. Credit rebuilding is when people with longer credit histories, on average, have better scores, so this shrinking effect can reduce scores gradually.

Total Accounts

Credit history affects credit scores and lenders and scoring models look for active credit histories with different kinds of accounts. A person with fewer total active accounts will be considered a higher risk than a person with many accounts but who is handling them properly. Suspended credit cards, as they reduce the total count of accounts, can also harm this part of a credit score. Yet the closure of old or inactive accounts can also influence the mix.

Other Conditions That May Affect Credit

Beyond the main scoring factors, closing credit cards and loans can impact credit in other ways.

Lower total accounts - Interest rates in the future could be worse, which would mean that APRs are higher. This ranges from the rates of new credit cards to new auto loans and so on.
Lost or less available credit – Due to the reduction of accounts, especially the loss of high-limit cards, future credit may be limited. This, in turn, leads to even higher utilization ratios.
Installment loans such as mortgages and student loans – elimination of installment loans affects the overall account mix in credit scoring models.
Negative impact on positive payment history – Failure to make payments on time on closed accounts will reduce positive payment history in the long run.

Evaluating the Pros and Cons of Cancellation

From what has been discussed above, it can be noted that there are indeed negative aspects related to credit health and closing accounts. However, that does not mean that closing is necessarily always the wrong action to take. Here are some pros that also should be considered.

Annual fees – It is possible to close credit cards with high annual fees but little or no value towards the rewards. This is because the cost savings gained from doing so counter the occasional decreases to the score resulting from minor damages.
Earlier account hacks - Closed accounts like these have a lower likelihood of being hacked than those with frequent activities.
Debt reduction commitment – Excess spending or failure in managing debts may be addressed by closing such tempting credit.
Simplicity – Having fewer accounts makes it easier for individuals to monitor and keep track of their money and payments.

Alternatives to Full Closure

For those worried about credit impacts but also seeking reduced hassles or fees, alternatives like product conversions or account downgrades may achieve similar benefits without losing anything.

Reducing an A list of premium cards while keeping the mix, history, and limits in check.
Converting high-interest credit cards to loans or personal lines of credit to keep the payment records positive.
Transferring rewards cards while maintaining the older accounts and using them occasionally to maintain length history.

In general, credit models consider accounts with a positive status and, preferably, those that are open and active as being optimally managed. Thus, before shutting any possibility, consider the benefits and risks; see if there are other ways of achieving the same objectives and passing credit score and history at the same time. The last ¼ of financial behavior is to check changes monthly with credit reports and concentrate on positive credit building. A few credit accounts closed here and there are not going to negate an otherwise positive credit history marked by proper credit utilization over the years.

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