Are you wondering if closing a credit card will harm your credit score?
Your credit score is essential, and you want to make sure you keep it as high as possible. That is why it is vital to know the risks associated with closing a credit card account. It is tempting to close your credit card if you do not use it often or if it has a high interest rate. But before you do, consider the consequences. Closing a credit card can damage your credit score, making it harder for you to get loans or mortgages in the future.
Do not close your credit cards without understanding the risks! Please continue reading. As in this blog post, we will explore the effects of closing a credit card on your credit score. We will also provide some information regarding ways to minimize the damage.
Factors Affecting Your Credit Score
Knowing that your credit score shows your financial stability and creditworthiness is vital. Credit scores range from 300 to 850. The higher your score is, the better. Lenders derive your credit score from your credit profile. Major credit bureaus are responsible for preparing credit reports. The report is what lenders need to determine your credit score.
There are several factors affecting your credit score. The factors include:
Credit History
Fifteen percent of your credit score goes to the length of time you use your credit. Lenders look into the average age of your credit. The longer your positive credit history is, the more beneficial your score. Many personal finance experts recommend keeping a credit card account open for years, regardless of whether you use it. Closing your oldest credit card from a reliable credit card issuer can decline your overall score.
Payment History
Your payment history makes 35 percent of your credit score. It is one of the most vital components of your credit score. To have a positive payment history, make sure to avoid the following:
- Missed Payments. Missed payments can harm your score. But, your chances of getting a good credit score are high when you pay off your debt on time and a regular basis.
- Late Payments. In general, the longer you wait to pay off your credit card balances or other types of credit, the worse your credit score will be.
- Negative Public Records. The list includes bankruptcies, foreclosures, debt settlements, charge-offs, etc. These are a no-no. Any negative public record, especially involving your finances, can significantly affect your score.
- Accounts Sent To Collections. Having your account sent to collections is a red flag to lenders. It gives them the impression that you might not pay your debt back.
Amounts Owed
The credit utilization ratio is crucial to achieving high FICO scores. Your credit utilization ratio refers to your amount of debt concerning your available credit. When lenders assess your creditworthiness, they consider how much your credit has been used. It is vital to know that having zero credit will not help you achieve your desired score. Lenders look into you how much you owe and how responsible you are in returning it. If you do not borrow money, it would be hard for lenders to judge if you can pay them back.
Types of Credit
Apart from credit card debt, other credit types can also affect your credit score. Ten percent of your FICO score is about your credit mix. The credit mix is the types of debts that make up your overall debt load. Having a variety of obligations – like installment loans, mortgages, and revolving lines of credit – shows lenders that you are capable to handle different types of debt. When you close a credit card, you are removing a kind of debt from your credit mix, which can hurt your score.
New Credit
Last but not least, FICO calculates your score by looking at the number of new accounts you have. Recent account openings with high percentages compared to your total number suggest that you may be a credit risk.
How Does Closing A Credit Card Affect Your Credit Score?
The effect of closing a credit card depends on the number of credit accounts you have and how responsible you are for using them. Learning how credit scores work will help you better understand the possible impacts of closing a credit account.
Two of the most significant effects of closing a credit card account include:
Increased Credit Utilization Ratio
Closing a credit card with the highest credit limit could hurt the most. If you do not know, your credit utilization ratio comprises 30 percent of your FICO credit score. The credit utilization ratio is the amount of debt you have compared to your available credit. For example, if you have a $500 balance on a card with a $2000 limit, your utilization ratio is 25 percent. That is within the acceptable range.
When you close a card, you lose the available credit, increasing your utilization ratio and lowering your credit score. If you aim for a high credit score, experts recommend maintaining a 30 percent or less credit utilization ratio. Account-holders with the highest credit scores usually use less than 10 percent only. It is noteworthy that a high credit utilization ratio indicates that you are using more of your available credit than you should. It could raise a red flag to lenders about your creditworthiness.
Reduced Credit History
When it comes to credit, the older your card is, the better your credit score. The age of your credit cards can also significantly affect your credit score. While not as much as your credit utilization ratio, it does affect.
FICO credit scoring considers your credit history. It makes 15 percent of your score. However, it is essential to know that closed credit card accounts are unlikely to immediately affect your FICO credit score. In most cases, your closed credit accounts (positive ones) will continue to contribute to your credit score for up to 10 years. Meanwhile, negative credit card accounts may take up to seven years before credit bureaus remove them from your credit report.
When Does Keeping A Credit Card Makes Sense?
Does cancelling a credit card hurt your credit? It depends on your credit situation. But cancelling your card does not also mean it is the best option, especially if you are working on your credit score. There are a few instances when keeping your credit card is a wiser decision. It includes:
- Your credit card is the oldest account you have on your credit report. Keep in mind that the longer your card is, the more beneficial it is for your score.
- You lack open credit accounts. Having a thin credit file will make it more challenging to qualify for new credits in the future.
- You have a credit score on the borderline of good credit. Doing otherwise may drop you back into the fair credit range.
- You have too many outstanding balances on your card. The closing of one card will reduce your available credit, which could be detrimental to your credit utilization ratio.
- Your only reason for dropping it is because you do not use it often. Not using the card often is the lamest excuse ever. Do not risk the possibility of a good credit score for such a lame excuse. Not using it regularly is not enough reason to drop it. Who knows, maybe in due time, you will use it more often than you thought.
- You are hoping to get rid of negative activity. The closing of your credit card account is not a solution for avoiding a bad transaction. It is vital to know that closing your account now does not immediately affect your credit reporting. The removal of your credit card activities from your credit profile takes years.
When Should I Close My Credit Card?
There is potential credit score damage when closing a credit card account. But, there are some circumstances when getting rid of your card becomes valid. Below are a few reasons why cancelling a credit card makes sense:
High Annual Fee
If your credit card company charges high annual fees for a card you do not use, closing the account is your best option. However, there are credit card companies that offer benefits and perks that outweigh the annual fees. In this case, keeping the card may be worth it.
High-Interest Rate
There are credit card companies that charge high-interest rates. Having such kind of a card may not be beneficial, especially if there are better options out there. Fortunately, many card issuers now offer a 0 percent annual percentage rate (APR) introductory period.
Having Trouble Using The Card Responsibly
Credit cards play a vital role in determining your creditworthiness. However, if it is not helping you become responsible for paying off your debts, it is time to get rid of them. Missed and late payments will not help you achieve your target credit score. Worse, overspending and not paying off on time and a regular basis may lead you into credit card debt. It could even bring you into too much trouble.
Divorce or Separation
If you have a joint credit card account, it is best to close the account during a divorce or separation. If you are a joint cardholder, you are liable for any past or future bills made using the account. It is possible for an angry and frustrated ex to overspend using your joint card. If you do not cut the account sooner, you may end up paying off a debt you do not owe.
Retail Credit Card
One valid reason for cancelling a card is when it is a retail credit card of a shop you no longer shop at. Keeping such a card will not be helpful, especially if you do not have plans of shopping there ever again. This is a common scenario when shops are no longer beneficial to the customer or do not offer attractive benefits and perks. In some cases, it happens when the retail credit card company has high fees and other charges.
Graduating From College
Another reason you may consider dropping a card is when you have already graduated from college. Keeping a student credit card will no longer be beneficial to you. Opening a new one that offers more rewards would be a better option.
How To Safely Close Your Credit Card Account?
Closing a credit card does not have to be the end of the world for your credit score – but it can impact. If you’re considering closing a credit card, understand the potential consequences first. And if you do decide to close a card, take steps to minimize the damage.
Closing a credit card account involves a lot of reckoning. You have to weigh the pros and cons. However, if you decide that keeping your unused credit card is not suitable for you, it is time to close the account. Below are steps you may follow to close an existing credit card safely.
Step 1: Redeem Unused Rewards
If you are cancelling a rewards credit card, it is best to redeem all unused rewards first. All points and miles you earned will disappear when you close the card. Depending on the card issuer, it may be possible for you to transfer your rewards to another card in the same rewards system.
Step 2: Pay Off Credit Card Balances
When closing a credit card, pay off all your balances first. You are mistaken if you think you can get away without paying your balances off. You will not be able to fully close the account unless you pay the credit card company the money you owe. Once you pay off your debt, confirm that your balance is $0 from your card issuer.
Step 3: Pay Off All Your Other Cards
Pay off all your other credit accounts before formally closing your card. At the very least, minimize your balances. Consider using a consolidation loan to help decrease your credit utilization rate. It could also help to get you out of debt sooner.
Step 4: Contact Your Credit Issuer
Call or send a mail to your credit card issuer. Talk to a customer service representative and inform them about your request to cancel a credit card. Do not forget to ask for a written confirmation that your balance is $0. Also, ask your card issuer to send you a closed account status through the mail. Make sure it indicates that you requested the closing of the account.
Step 5: Update Payment Information
If you are using the card for any automatic payments like phone bills or online accounts, make sure to go through them and update your payment information. That way, you do not miss any payments and would not get into any trouble.
Step 6: Inform Your Authorizes Users
If your card has any authorized users, inform them about the closure of the account. Ask them to destroy their card immediately.
Step 7: Destroy Your Card
Properly destroy your card. If possible, use a shredder to get rid of it. Ruining your card will make it difficult for a potential thief to use your card.
Step 8: Monitor Credit Reports
Once you are done with all the previous steps, it is time to keep an eye on your three credit reports. Make sure the credit issuer updates the account. It should show that the account is closed and with no outstanding balances. The monitoring process should take 30 to 40 days after you cancel your card. Should the report becomes available, and there is incorrect information, dispute them right away.
Alternatives To Closing A Credit Card
Once you are done weighing all options and have decided to keep your card, it is time to look at ways to mitigate the problems you have with your card. Problems that made you think about closing the account.
Swap Your Card
If you are unhappy and unsatisfied with what your card offers, talk to your card issuer—and request a product change. Check your options and choose one that you think is best for you. If your concern, for example, is a high annual fee, you can ask your card issuer if you can downgrade to a no-annual-fee card instead.
Ask For An Upgrade
Instead, you may want to ask your card issuer to upgrade your secured credit card to an unsecured account. There are credit card providers that automatically boost once you show responsible credit use. Others, you may need some convincing power that you can own an upgraded card. Otherwise, as your card issuer of tips that will lead you to an upgrade and work on it.
Use the Card for Small Payments
Instead of letting go of your card, use it to make small payments regularly. For example, you may opt to use it for an automatic monthly payment to your Spotify account. That way, your card remains open and active.
Ways To Improve Credit Scores
Having a credit card can be very useful and helpful when building credit scores. Lenders consider your creditworthiness on your credit and payment history, credit accounts, new accounts, and credit utilization.
There are plenty of ways that will help you achieve your score goals. The most significant ones include:
Paying Bills On Time
Paying bills on time is a positive indication that you are an excellent borrower. It is a green light for lenders.
Keeping Credit Balances Low
Do not overspend. Avoid it at all costs. Instead, keep your balances low. That way, your credit utilization will also remain within the desirable range.
Applying for New Credit Only When Necessary
Having multiple credits all at the same time can be beneficial but not necessary. It can cause harm if you are unable to pay your obligations on time. Thus, it is best to only apply for new credit when you need it instead.
Reviewing Your Credit Report Regularly
Always review your credit reports. Make sure to check for accuracy. Should there be inconsistencies or wrong information, make a dispute immediately.
Being An Authorized User
An authorized tradeline user is authorized to use another person’s credit card account. This can be helpful if you have a family member or close friend with good credit who is willing to add you as an authorized user on their account. Otherwise, you can buy from trustworthy tradeline companies like Coast Tradelines. Once you become an authorized user, you will get your card to use, and the activity on the account will show up on your credit report. This can help you build a credit history and improve your score.
About Coast Tradelines
Coast Tradelines is a well-established tradeline provider with an excellent reputation. We have been in operation for years. Our company offers high-quality credit improvement services as part of the package deal. If you are looking to improve your credit score fast, look no further than us – at Coast Tradelines.
There are many reasons why you should be buying your tradelines from us. But, let us focus on the most significant ones, which include:
- Legitimacy. Coast Tradelines is a legit tradeline company. We have the necessary permits and licenses to operate as one. Thus, you can rest assured all accounts and transactions are legal.
- Tradeline Specialists. Our team has years of experience in the tradeline industry. To say that we know the ins and outs of the business is an understatement. Given our expertise, we can help you achieve your financial goals. As a result, you can improve the quality of your life.
- Wide Range of Quality Tradelines. We offer an array of quality tradelines. We have seasoned tradelines, which are ideal for helping improve credit scores.
- Affordable Prices. We offer a wide variety of trade lines at highly competitive prices. As one of the industry’s leading tradeline experts, we work hard to ensure we offer you the most competitive prices.
Final Thoughts
Coast Tradelines is here to help you understand how closing a credit card can impact your credit score. We want to make sure you make the best decision for your financial future. By understanding the effects of closing a credit card, you can be proactive in protecting your credit score and maintaining good financial health. Coast Tradelines is committed to providing you with the resources and information you need to make informed decisions about your credit.
Contact our team today to learn more about our services and how we help improve credit scores.
