In order to improve their credit score, many people ask if closing a credit card
will negatively impact their credit rating.
The answer to this question is not always cut and dried and can lead to different results for different people.
The choice is ultimately up to the individual, so take a look at some things to consider before acting.
1. Pay Off the Balance
First of all, if you do ever decide to close a credit card make sure that the balance is paid off in full.
If you close a credit card without paying it off first, your accounts will become delinquent and negatively impact your credit rating.
2. Newest Goes First
If you are going to close a credit card, always choose the newest cards first.
The older a credit card is, the more weight it carries on your credit report.
This means, if you close an older credit card, your credit report can no longer prove a long credit history thus leading to a drop on your credit rating.
3. Utilization Ratio
Always take into consideration the Utilization Ratio. This is one of the key factors that determine your credit score.
Let’s say for example you have 2 credit cards each with a credit limit of $2,000 for a total credit limit of $4,000. On one card you have a balance of $1,000 and on the other card your balance is 0. This means that your utilization ratio is 25% ($1000 divided by $4000 is .25 or 25%).
If you decide to close the credit card with the zero balance, your Utilization Ratio will increase. Now you will have a 50% ratio instead of only 25% because $1000 divided by the new credit limit of $2000 is 50%.
Because you have increased your utilization ratio, your credit rating will incur a temporary ‘ding’.
4. Major Purchases?
If you are planning to make a major purchase in the near future, such as a house, car, boat or anything that requires getting a loan, then don’t be in a rush to close off credit cards right now. Doing so will cause a ‘ding’ in your credit report.
In short, closing credit cards can definitely lower your credit score but there are also very good reasons to close credit cards as well.
Consider the pros to closing a credit card:
- If you have a zero balance on your credit cards and your credit card score is good, then go ahead and close them.
If all your credit cards are balance free, it will not hurt your credit rating.
- Closing unused credit cards will help prevent identity theft. With so many criminals having access to so much information, closing unused accounts will help take you off their radar.
- Closing your unused cards will keep you from accruing unwanted debt. You never know when you’ll be in a
situation where you feel you need to spend money on your credit card, whether it’s an emergency situation or just
something you want. Before you know it, you can have piles of debt.
- Without easy access to credit, you’ll be more in control of your finances.
Make it a goal to plan for life’s little surprises by building up a cash emergency fund as opposed to using a credit card
and accruing more debt.
In the long run the best option for improving your credit score, is to pay off your credit card balances in full if possible.
And if you are not in a situation to do this, then make sure you are never delinquent on any payments.