How Does Closing A Credit Card Affect My Score?

Any time that you are seeking to boost your credit score it is always important to know if you should cancel certain of your infrequently used credit cards. Isn’t it safe to close credit cards that you do not frequently use anymore? However, it was a surprise that closing a credit card may also have a negative bearing on the credit rating score. Here is what it looks like:

Credit History Length

A component of your FICO credit score is the length of your credit history. This means the length of time during which you have had a credit account whereby you are given credit. In general, the longer your credit history is, the better it is. Closing a credit card means that you are eliminating that particular credit line of your credit history which can lead to a reduction of the overall credit history. This can reduce your credit score or drastically lower it, depending on how much available credit you have left.

For instance, let me explain it with an example scenario where you have five credit cards. Four cards have been open for two years, but your oldest card has been active for fifteen years. If you close that oldest card, then you would be erasing that lengthy credit history from your records, therefore reducing your average credit history length. This could severely affect your credit score and your ability to secure credit in the future.

Your Credit Utilization Ratio

The credit utilization ratio is another component of your credit score. This is a measure of what percent of your total credit limit you are currently utilizing. In general, it is best to keep the credit utilization percentage below 30 percent. Therefore if you have all your total credit limit to be $10,000, you should ensure that your total balances do not go beyond $3,000 for the month.

This is because when you close a credit card, your total available credit is reduced. This means the proportion of your available credit that you use will rise, even if your spending remains constant from month to month. For instance, perhaps you have a total credit of $10,000 and balances on your credit report of $2,000 monthly, then your credit utilization ratio will be 20 percent. But if you have a card that has an available credit limit of $5,000 then if you decide to close the card you only have $5,000 remaining in total credit. If your monthly balances remain $2,000, credit utilization increases to 40 percent – a level that may be detrimental to your score and could lead to a decline.

The Mix of Credit Types

Most lenders or credit referencing systems also prefer to see one has a variety of credit facilities such as credit cards, retail cards, installment facilities, automobile credit, and a home mortgage. This variety proves that you are capable of handling different kinds of loans responsibly.

Closing a credit card means you are reducing the variety of credit that you have, which could be bad for your score. For instance, you might be paying a mortgage, student loan, car loan, and three different credit cards. You then decide to close two of the three cards you had opened. This means that you are left with a relatively smaller number of credit card accounts compared to the other forms of loans. While you are still listed as having credit cards, it is clear that your credit mix consists of more of installment loans. This balance shift could bring your score down.

Strategies for Reducing Effects of CLOSING an Old Card

If you have concluded that you should shut an old credit card account, there are ways of reducing the effects [sic] on your credit score as follows:

First, you need to ensure that you have cleared the balance on the card before you can close the credit card account. The usefulness of keeping a card open is negated by the credit score increase you got it for if you max out the card before closure.

Second, think about how you could move some of your credit limits from the old card before you decide to close it. For instance, you could do a balance transfer of a part of the limit from the card you want to close to an existing card you frequently use. This ensures that the extra credit limit remains open to retain your overall credit utilization. As long as the card that you transfer the balance to does not start charging deferred interest, then go ahead.

Finally, spend some time thinking about which card is best to be closed in case you are inclined to do that. It is ideal not to close the oldest credit accounts as these have a positive effect on your credit history. These credit cards usually have lower credit limits as compared to major credit cards, so closing a particular card will not have a significant effect on the general utilization ratio. Run through the numbers to determine which card closure is going to have the least impact on your ratio.

Last but not least, avoid making any further moves to close other credit cards for a while at least after closing the first one. Lenders perceive it as dangerous when you close many cards, especially in a short period and it hurts your score more than you can imagine.

Be Strategic About Closures

This is similar to cleaning out the mess in your house since closing a credit card you do not need or want is a good thing. But do not rush to get there without weighing all the possibilities. Consider the effect that potential card closures may have on your credit history, credit utilization, and credit mix. It is quite possible to get rid of an unwanted card while still keeping it active to maintain your current credit rating if you plan this right.