How Does Closing A Credit Card Affect Your Credit Score?

It is also important to note that the act of closing the credit cards has certain drawbacks and might slightly worsen the credit score. A credit score is determined by the information contained in credit reports that are maintained by the three credit reporting agencies. Credit reports contain information concerning the repayment record, credit utilization, credit history, credit type, and credit inquiry. All of these are factors that help to calculate your three-digit credit score.

If you decide to close a credit card account, it affects some data in the credit report and credit score factors. It may either reduce your credit score, increase or not have any impact on your credit score depending on your credit history. Below is a breakdown of how closing an account usually affects credit:

Credit Usage Ratio

Credit utilization is among the biggest factors that affect your credit score. This ratio is the total of all outstanding credit card balances to the total credit limit on all the cards. It is suggested that this ratio should not be more than 30 percent.

It reduces the total credit limit available for the credit card holder when he or she decides to close the credit card account. If you have balances in other accounts, then it will affect the credit usage ratio when you close an account. For instance, you have a combined credit limit of one thousand, ten thousand dollars in three credit cards and you owe five thousand dollars; your utilization rate is fifty percent. For example, if you have one card with a 2,000 dollar limit and you close that card, your ratio becomes 56 percent even though your balances have not changed.

This increases the credit utilization ratio because it shows that you are using a higher proportion of your remaining credit limit than before. Moreover, getting out of that 30 percent utilization increases the overall decrease in many instances.

Credit Age

Another element that contributes to credit scores is the average age of your credit accounts. This shows how long you have been borrowing the credit and the type of credit accounts you have; whether they are recent or old. In calculating the average age of accounts, say, if an account is closed, then it is removed from the equation.

This is especially the case if the credit card that you close has been in your credit report for a long time. For example, if you opened your first card 15 years ago, but you closed it, the average age of your accounts will automatically decrease to the age of your second card. This shortened credit history can lower your score.

On the other hand, if you close a newer credit card that was only recently opened, this may not affect this factor which is used in the computation of your score.

Credit Mix

It also keeps lenders happy when borrowers have been able to manage the various credit accounts that they have opened in the past. This encompasses secured loans such as mortgages, auto loans, and student loans and unsecured loans such as credit cards. Having a good credit mix shows that one is capable of handling different kinds of accounts as required.

Closing a credit card means that one reduces the number of active revolving accounts available to him or her. This loss of credit mix variety can sometimes even reduce credit scores in some cases This inclination towards one type of credit also has its consequences on credit scores. Nonetheless, the impact is relatively small for most borrowers, especially in comparison with the utilization and the age of credit factors.

Removing a Closed Account

An important thing that one needs to know is that an account that shows ‘closed’ on your credit report can continue to affect your credit score for as long as a decade. This is because the credit accounts that were closed and were in good standing are reported and contributed for several years after closure.

For instance, a credit card that has been closed but was in good standing when closed will help to age your credit history for scoring. Furthermore, it does not deceive your credit utilization or mix ratios, as closed accounts are not considered available credits or open accounts.

The majority of the closed accounts disappear from your credit report after seven to 10 years from the time the account was closed. If at all they are once removed, then they do not influence your score calculations in any way. This implies that any adverse effects from closure are reduced over time and by the end of the process, they are non-existent.

Costs and Benefits

However, as you may notice, it solely depends on your credit and whether it will affect your credit score positively or negatively through credit card closure. The advantages also have their disadvantages as well as short-term and long-term effects.

For example, closing an old card could potentially negatively affect your credit score at the moment, but, it will positively contribute by reducing the age factor later. Having open cards is beneficial for credit limits and diversification but credit card holders have to pay certain fees for card maintenance. Trade-off decisions involve evaluating the contribution of each factor to the current score breakdown.

But most important of all, always double-check your credit reports and your credit scores before making any decisions. Also, comprehend score factors such as your utilization ratio. Study ordinary effects by major credit scoring firms. With this background, you can say whether closing an account looks set to cause significant harm.

Minimizing Damage

If you determine a credit card closure could drop your scores significantly, there may be alternatives to closing the account entirely and taking steps to minimize damage.

Inform the card company that you wish to downgrade to a card with no annual fee instead of canceling.
First, it’s advised to lower balances on other cards before closing them in a bid to maintain low credit utilization.
Obtain a new card and activate it before canceling the previous one
Some credit cards featured here are relatively newer than other accounts created a long time ago
It is advisable to disperse account closures rather than close multiple accounts at once

Preferably, one should spend considerable time identifying viable choices, think far ahead, and time the shutdowns at the right moment to avert high credit usage ratios or loss of important aged customers. It is crucial to avoid significant score fluctuations when some accounts have to be closed, and the systematic approach helps to achieve that goal.

I will discuss how credit card closure affects credit scores and why it has a complex effect. However, you should be able to avoid such damage by carefully studying timing, sacrifices, and options. It can also help you track the changes in your scores before and after account closures which would guarantee your hard-earned rating does not drop.

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