Will Closing Credit Card Affect Credit Score?

Your Credit Score and Closing Credit Cards

The credit score is a numerical interpretation of a person's capacity to pay back a borrowed sum of money. The information in your credit file determines it and indicates to creditors your creditworthiness in debt repaymentment. Generally speaking, credit scores are meant to support the theory that, the greater one's chances of getting authorized for loans and credit cards with reasonable interest rates the higher their score is.

Your credit use ratio has another impact on your credit score. This ratio computes your current credit card balance relative to the total credit limit on the cards. Your credit should be in excellent condition if you avoid using more than thirty percent. Closing a credit card account reduces the overall credit that is accessible to you, thereby increasing the credit use rate. Still, this might lower your credit score and have some drawbacks as it costs some money.

Is Closing Your Credit Card Helpful to Your Credit Score?

It is important to note that closing an old credit card can have an impact on your credit rating in the following ways.

Length of Credit History

The length of your credit history also plays an important role and contributes to 15% of your FICO Score. This means the number of months that the applicant has been in a credit reference for credit. ” The longer you have had credit accounts active, the more information the credit bureaus have concerning your payment history and creditworthiness. Also, the fact that their credit history is rich and has been traced for many years has a positive effect.

It is also important not to close your oldest credit card because this reduces the credit history length and therefore your credit score.

Credit Utilization Ratio

To recap, the credit utilization ratio contributes to 30% of your credit score computation as highlighted above. When you close your credit card, your total amount of available credit is reduced. Thus, your credit utilization ratio is higher reflecting that you rely more on credit cards. This puts the lenders at more risk and may lead to a decline in your credit score.

Credit Mix

Credit mix is the number of credit cards and other credit such as auto loans, mortgages, etc., which forms 10% of your credit score. Closing a credit card also reduces one category of credit from the credit report. This can be detrimental to your score if you have experienced a decrease in credit mix variety.

How Many Points Will My Credit Score Decrease?

The extent your credit score drops when you close an account depends on several factors.

• The age of the credit card
• The credit limit you maintain on the card
• Your current credit history and your current credit standing
• This is the total number of accounts you will have after closing the specific credit card.

In general, there will be a slight decline ranging from 5 to 20 points. This should not be much of a problem for individuals who have had a clean credit score record for several years.

But if the card you close is your first credit account, if you have a high balance on the closed card, or if you have few credit card accounts in total, you could see a greater impact of this change ranging from 20 to even over 100 points.

Lessening the Harm of Score Decrease Due to Closing Credit Card

If you have decided to close an old credit card, you can take measures to reduce damage to your credit score.

1. Pay off Card Balance: In addition, do not close any of your credit card accounts before you settle all balances in full. This will assist in reducing your credit utilization levels before the credit reporting bureau checks your credit rating.
2. Allow Account to Age: It is advisable to keep old credit cards active and let them stay dormant to build length of credit history if possible.
3. Open a New Card: It is advisable to apply for a new credit card several months before closing the old one. This helps in keeping a balance between the credit utilization and the types of accounts that you have thus maintaining your overall credit balance.
4. Limit Hard Inquiries: Any credit card application results in a hard inquiry on your credit file. You will see that making too many inquiries in a short period is not good for your credit score it will reduce it for a while. Rather use prequalified offers which are deals that do not involve pulling off your credit reports.

The following are some scenarios where it is wise not to close a credit card.

It is very important to note that closing your oldest credit card or any card that has a very large credit limit can significantly alter your credit file composition. Keep these types of card accounts open instead.

• This one is the oldest credit card account
• Credit cards issued 10 or more years ago
• Any cards with high limits
• Positive History Cards: These are the cards that have been used frequently and show that the client has had a long history of positive behavior.

Even the basic act of cutting up an old inactive credit card that has been stored in your sock drawer should not change your score drastically. It is advisable to use your discretion and try to retain stable accounts, in use, and long-standing.

Article Summary

You may also notice a slight credit score decrease in the short term after closing the account since credit utilization rates and length of credit history have changed. However, the effect is normally short-lived and relatively insignificant compared to the numerous advantages that are associated with the prudent management of credit-worthy accounts. Close credit cards judiciously while opening new credit accounts to fill voids that may occur in credit records. Using Credit Sesame to keep track of your credit will assist you in the right decisions in handling credit cards and loans to reach your optimum credit score.

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