If you’re planning to close down your credit card account which is not in use for a quiet time, then you need to reconsider this idea and think about it again. That’s because closing your credit card account can lower down your credit score. The main two reason behind it is that first, it will reduce the credit length especially when you had a working account for many years and second, by reducing your available credit.
Does closing a Credit Card Affect your Credit Score?
The major factor affecting your credit score is your credit history, 15% of the credit scores are affected by this history including your FICO credit score. It takes into account how long you’ve had credit and the opening dates of all the accounts. This can either lower your credit score or nor do anything but never help your credit score.
Also, your available credit directly impacts your credit utilization rate, which means how much debt you owe versus how much available credit you have. This credit utilization rate accounts for 30% of the credit score. You’re using a higher percentage of the credit available to you when the limit of the closed card is taken out of utilization calculations. There is a problem if your credit utilization rate exceeds 30%, ideally, you will utilize only the 10% of the allotted credit.
So when we talk about credit score, closing your credit card accounts which are not in use can be your biggest mistake. Having a number of credit cards is not a bad thing, maybe, it can protect you from huge dings to your credit utilization rate.
Should a credit card be closed?
The experts advise their clients to weigh this option when it comes to closing the credit card. It’s important to remember that the credit score depends upon one’s credit history, so an account with a long credit history should be kept open not be closed.
It could be in the best interest to close the account in exchange for lower interest rates if the client is in high credit card debt. It’s better to keep the good account open rather than opening a new account. This way your credit history will not be hurt or your utilization rate as much. In order to escape the terms and save yourself from fees when a credit card issuer suddenly changes your APR or annual fee, you can close the card.
Before closing you credit account few things you should remember-
1) Closing your Credit Card Account Hurts Your History
A positive credit history information of your credit card will always stay in your credit report definitely but when you close the account it is usually removed within ten years. Once the account is closed, that account wipes out your credit history associated with the account. So it’ better to keep the account open for the benefit of your credit score. You can also check your credit score before closing your credit score account.
2) Closing An Account Hurts Your “Credit Utilization”
Revolving Utilization is the amount of revolving credit card limits you are currently using. You’ll want your revolving utilization to be as low as possible, to maximize your credit scores. Revolving Utilization can be lowered by An open credit line with a roomy limit and zero balance, especially when you carry balances on other accounts. So one should keep his/her revolving utilization low by keeping old accounts open with their balances low.
3) If you close your Credit Card
If you have a joint credit account with your spouse and you’re having a divorce then there are few things you should keep in mind.
Firstly, don’t close the credit card if its the only one you have. The mixture of credit accounts you have is extremely beneficial as it accounts for 10% of the credit score. Your score will most likely suffer if you have a variety of loans and close your only credit card.
You’re still going to have to pay off the purchases and you’ll want to aim to do so right away since that available credit limit will be gone once the card is closed, even if those charges aren’t even you may be able to close a card with a balance. Your credit limit reduces to zero when you close an account which has balance, so it might look like you’ve maxed out a card when in reality you’ve merely closed an account. You can close the account after transferring the balance to another account which has 0% balance.
What to do after a credit card cancels?
Credit Reporting Agencies are informed about any closed accounts within a month, but the positive effects last for ten years. Your credit score can drastically change if you have closed one account and if you think to close the other accounts too, it can have a negative impact. You should hold onto your other long-standing credit accounts if possible because your credit history is important. You can build your credit by keeping those accounts open and using your credit cards at least once a month, or at least negate any potential score decreases that might come from canceling a card.