If pondering about canceling a credit card, it is paramount to know the expected benefits and risks related to closing a credit account. While closing a credit card can be as straightforward as reaching out to your bank and requesting that it closes the card, there are criteria to think about first. You should ponder if the card has a remaining balance if there are alternatives to closing the account, and how closing the card may impact the credit score. Depending on how many other credit accounts you have open and if you use those credit accounts accordingly. Knowing how your credit score works will help in better understanding what the credit effect of closing the card may be.
Closing a credit card can improve the credit utilization ratio
The credit utilization ratio comprises 30 percent of the FICO credit score. Since your credit utilization ratio is the ratio of the current balances to the available credit, lowering the amount of credit accessible to you by closing a credit card can cause your credit utilization ratio to go up and your credit score to diminish.
Closing the old credit card can lower the length of your credit report
The length of your credit history accounts for 15 percent of the FICO credit score. It should be worth mentioning that you probably will not see the effect on your credit score immediately. Since closed credit accounts still contribute to your FICO credit score. Until they fall off your credit report which could be as far as ten years from now.
How do utilization rates influence scores?
The credit utilization ratio, or balance-to-limit ratio, is the second most crucial factor in your credit scores. You can ascertain your overall credit utilization ratio by adding the total of all your credit card balances. Then dividing them by the whole of all your credit limits, multiply by 100 to see the utilization percentage. The lower your utilization rate, the better for credit scores less than 10% is preferable. Paying your balances in full each month is best. For this purpose, leaving your credit card accounts open after you settle them is usually better for credit scores. As their credit limit will continue to factor into your utilization ratio.
The scores may not be the only factor in your decision
In some occurrences, credit scores may not be the deciding factor in determining whether or not to close credit card accounts once they are done with. It is best if your other cards carry low or no balances. Further, if you have gotten into trouble with credit card debt in the past, you may sense that closing an account. Two could help you steer the need to overspend.
The effect of closing credit card accounts is not permanent
While closing an account can bring about a dip in credit scores, it is generally temporary. If thinking about applying for credit in the next six months, it is in all probability best not to close or open any new accounts. Any major changes to your credit can cause scores to drop until your credit history stabilizes again. However, if you have more than one credit card account, you know you will be applying for credit anytime soon. That temporary decrease in scores may not be a worry.
In summary
There are advantages and disadvantages to closing a credit card, only you can choose if the benefits exceed the drawbacks. You must be worried about the negative side of closing a credit card, such as a short-term dip in your credit score. Ponder upon alternatives such as exchanging your credit card for another card provided by the same issuer. Although, if you close one card and carry on to use your remaining credit cards responsibly. Your credit history should remain positive
Also, here are some steps you can take to improve your credit:
- Making all payments on time. Your payment history is the most crucial factor in credit scores, and missing even a single payment can have a huge effect on scores.
- Bring any past-due accounts current. If you have any accounts that are past due, bringing them present is key to improving your credit scores.
- Reduce balances on revolving accounts. Preferably, you should pay credit card balances in complete each month.