Establishing a positive credit score is critical, especially for persons who use various types of credit regularly.
Most lending and banking organizations view a strong credit score as a positive indicator of your ability to handle your money properly. It is used as a primary factor in their decision to accept loan applications.
As a result, it’s critical to keep your score high and avoid taking severe measures that might drop it!
The Impact of Closing Credit Card Accounts
Closing credit card accounts is one move that might harm your total credit score. Closing a credit card impacts two aspects of your credit score: the amount of debt you owe as well as the credit history duration.
Understand that doing so will affect your credit score, particularly if your credit card account is still open and has accessible credit while your other credit cards do not. Furthermore, closing your oldest credit card and having no other credit cards or loans to utilize will harm your credit score.
Top 3 Impacts of Closing Credit Card
There’s a lot of information going around out there regarding the best methods to improve your credit score. Many individuals believe, for example, that canceling a credit account will instantly raise their score. Nothing could be further from the truth. In reality, closing a credit account will usually result in a negative impact on your credit score.
1. Your revolving credit usage rate will be affected.
The percentage of available credit you utilize across your credit card accounts is known as your usage rate. If and when you close an account, this usage rate will change. Because the usage rate is part of the calculation used to generate your FICO credit score, those adjustments might negatively influence your score (30 percent of it).
2. It will wipe off your extensive credit history.
The credit history duration accounts for 15% of your FICO credit score. It implies that the more credit you have, the better. If the card you’re canceling is one of your oldest accounts, you should expect a large drop in your credit score. If the account you’re deleting isn’t the oldest, on the other hand, you won’t have to worry as much about lowering your score.
3. It can eliminate a critical form of credit from the credit mix.
The combination of your credit accounts for 10% of your FICO credit score. It implies that you should have at least one of the three types of credit accounts included on your credit report: revolving, installment, and open.
A revolving account does not have to be paid in full each month and whose payment might vary from month to month. This type of account includes credit cards (both bank and non-bank issued) and home equity lines of credit.
An installment account needs a fixed monthly payment for a certain period. A mortgage, a vehicle loan, a student loan, a home equity loan, or a signature loan are all examples of installment accounts.
An open account does not have a “line of credit” and must be paid in full each month. Because this sort of account still appears on your credit report, you’ll need to pay on time and accurately to keep your credit in good standing. Open accounts include mobile phone accounts, utility accounts, and cable or satellite TV accounts.
A Better Alternative to Closing an Account
The greatest strategy to improve your credit score is to pay off your credit card and keep it open as a revolving account instead of canceling it. This method provides a more favorable use rate while also preserving an older account on your credit report and adds to your “mix” of available credit.