Conventional wisdom suggests you don't ever close a credit card because it hurts your score.
Is that real, huh? Perhaps the answer is, maybe not. As for any of the associated credit ratings, there are many aspects to remember. So, let's take a closer look at this and see what we can find.
How does the closure of a credit card impact your score?
There are two main possible impacts from the closure of credit card balances. First and foremost, you lose all credit left on your wallet. It will, in essence, influence the credit usage portion of your credit score. It calculates how much of the credit you spent on-card and on both of the cards.
This aspect is critical to your FICO ranking, coming second behind the payment background and counting 30 percent of the sum. The utilization ratio is also more vital to your VantageScore, which uses a weighted ranking that counts utilization as "highly influential." My advice is to keep your utilization rate at 25% or less. The lower, the stronger one!
The effect of card closure appears to fall quite strongly on those whose capacity to charge is neither high nor small, but "about right." Here's how this applies: if you have several cards and maxed out or very close to being maxed out, closing your account would not make much of a difference in the using department. The damage to your ranking has already been done.
And don't make a mistake — Maximating a card is no ideal for your credit score. Closing a maxed-out card might be the right option for some reasons, but don't forget that you're on the hook for payments until they are paid off. Conversely, if you have a lot of unused credit available and distributed through various accounts, shutting one card down would not cause much of a difference in the usage rate.
It is a simplified example of why:
Card Customer No. 1 has a Passport, an American Express card, and a Mastercard. Each has a limit of $5,000, and each has a fee of $4,000. No. 1 usage ratio is 80 percent for each card and 80 percent for both cards. It is a negative percentage of utilization. Closing one card would bring the usage rate for all cards to 120 percent and only 80 percent on each available card. Yeah, this is technically worse, but the initial situation was so detrimental at 80% that the effect on the score would be negligible, if any, at all.
Card Owner No. 2 has six credit cards — two Passport, two American Express, and two Mastercards with a $5,000 limit. User No. 2 uses cards sparingly and is never matched. As a result, she never has more than $1,000 in balance scattered through all her cards. No. 2 's gross and usage rate is 3.3% or $1,000 due against $30,000 of available credit. It is an impressive one-digit usage figure. Closing a $5,000 card and losing the cap would push the cumulative balance to $25,000 with a $1,000 balance with a 4 percent usage rate. It is still outstanding.
The second region of possible influence is the length of the credit history component. With 15% of your FICO ranking, keeping older accounts open longer can be a real plus. Before closing your account, make sure to verify how long it has been reported.
If one of your older accounts and you appear to churn your other cards every year or two, closing your account could be an error of score if (in 10 years or so) a good account history is no longer seen on your credit report.
How are you going to close a card without damaging your score?
You will close a card without having much effect on your ranking. You will do this by paying off all of your cards before you shut the card in question. Your consumption score would not be influenced in this way. But this only applies if any of the credit cards have a minimal (relative to the available line of credit) or negative balance. Note, if all of your cards have a balance (no matter how small), closing your account would raise the average usage rate, and you will have reduced the total available credit.
At the risk of repeating myself, I would point out that a maxed-out card has already done so much harm to your score that closing it doesn't make much of a difference. So, in this case, you're not going to damage your score any further, if at all, by closing the card. And if you do this with a debt repayment strategy (see clarification below), your on-time contributions will still help carry your score up (in time) even though your accounts will be closed.
When are you going to consider closing a card?
There are legitimate reasons to close a card, despite how it might affect your credit score.
It should charge an annual fee.
It can charge a high annual fee or provide perks that you can't use, such as travel benefits, if you don't intend to travel shortly. However, before you do so, consider some potential incentives, such as cashback on food ordering costs or your telephone or telephone fees. You will find that these advantages are worth the annual charge. (You can also order a transfer to a new card that does not charge an annual fee if your issuer so permits.)
It is a shared account of an ex.
In the event of a breakup or divorce, it is probably prudent to close a credit card that is a shared account. And if a judge will require your ex to pay, the lender will certainly look to you for payment if it does not pay. Judicial rulings don't mean a thing to the creditor because your name is on the account. Closing a joint account does not cover you in this case, but it can deter potential charges. If you intend to complete a joint statement, please always inform the other party before you do so, if only as a courtesy.
You're dealing with over-spending
For those who are dealing with overspending, it could be too enticing to leave the card open. That's a fair excuse to close it, even if you can lose a few points on your ranking before you pay off your balances. It's easier to lose those points than dig a pit that would be tough to get out of, financially speaking.
You've got so much debt.
Another excuse to close a card could be because you have overwhelming credit card debt. About any borrower proposes a programme of difficulties to customers who are suffering. These services are generally short-term and typically do not force you to close your account, but some can.
However, if you want to partner with a financial counseling service to pay off your account(s) with a debt management plan (DPM), you will probably have to close those accounts. A DMP is a systematic method intended to pay down the loans in five years or less. I suggest using an accredited non-profit credit counseling agency from the National Credit Counseling Organization if you want to follow this path.
Will you close your credit card account with an unpaid balance?
Yes, you can close any account at any time for any reason whatsoever. However, as I said before, closing an account would not rid you of your obligation to refund the balance. If an account has been locked, you can continue to pay it under the terms of the initial arrangement (which ensures that the borrower can not increase the interest rate or all other terms).
Why do you continue to leave old accounts open?
As I described above, keeping older accounts will benefit you with a ranking category that awards credit durability.
You may also have a card that you haven't used for a while, and you may figure you should go ahead and close it. But, as we have shown, closing an account can have a detrimental impact on your credit score. It is particularly valid if the account in question has a reasonable amount of credit available. So, unless there is some valid justification to close it, maintaining current credit lines would only help you score.
You may be afraid that the lender may shut the account because it is not being used, and you may be right. It could happen after a year of inactivity, which is, in fact, one of the most important reasons that the borrower has closed the accounts. The easy way to keep this from happening is to use the card occasionally.
But I don't mean using the card to incur additional debt; instead, use it for transactions that you've already decided to make and can afford to pay off immediately. Some good examples are petrol and food. All costs should now be included in the monthly schedule.
You don't even have to use the card every time; use it every few months for one of these reasons, and you can please the creditor. (Don't forget when you use it to make sure you don't lose a payment. Missing payments will do significant harm to your score.)
Closing an account can be handled in the same manner as opening an account with deliberate thinking. Doing that is going to put you on the road to the credit score you deserve. Good luck to you!