Don’t close that card just yet

Closing a credit card may seem like a straightforward solution to managing credit, but it can have a significant impact on your credit score. Two crucial issues can arise from closing an account: changes in your utilization ratio and the removal of the account from your credit history.

Utilization ratio is the amount of credit you use in comparison to your available credit limit. When you close a credit card account, the credit limit on that card is no longer considered in your utilization ratio. For instance, if you have four credit cards with a total credit limit of $31,000, and a balance of $10,000, your utilization ratio would be 33%. If you decide to close credit card A, which has a credit limit of $20,000, your available credit limit is reduced to $11,000, and your utilization ratio skyrockets to 99%. This increase in utilization can significantly affect your credit score, as utilization ratio is a significant factor in calculating your FICO score, which comprises 30% of your credit score.

It is essential to understand the impact of closing an account on the average age and length of your credit history. A long credit history and an average age of accounts are critical factors that determine your creditworthiness. Closing a credit card account can impact both of these factors. For example, let’s say you closed your oldest credit card account, which was ten years old, and later opened a new credit card account. Your average age of accounts would decrease as your oldest credit card account would no longer be considered. Moreover, when the closed account falls off your credit report ten years later, it could negatively affect the length of your credit history, which accounts for 15% of your FICO score.

It is vital to keep in mind that closed accounts don’t disappear from your credit history immediately. The account will remain on your credit report for ten years, which gives you time to plan and manage your credit wisely. If you decide to close an account, ensure that you have other credit cards that you can rely on to keep your utilization ratio low and your average age of accounts and length of credit history high.

Verdict

Close your cards only in these scenarios:

1. It has a very high annual fee and you cannot downgrade the card to a fee-free version
2. This is not your oldest card or you don’t have another card opened around the same time period
3. This won’t negatively effect your utilization