Thinking of Closing that Credit Card Account to Improve Your Credit Rating? Think Carefully.
By Sylvia Burleigh
I try to plan ahead as much as possible, especially for the holidays, so imagine my surprise when I arrive at the Target checkout and my card is declined. I had no problem using my debit card, so I used that instead, but I have to say that I was a little saddened that I couldn’t take advantage of the 5% discount offer. As curious as I am, I wanted to know how much of a mark a preemptive closing of a credit card would leave on my credit history and my total credit score.
If your credit is in need of repair, you may be considering closing or canceling a credit card account to improve your credit score. Maybe the issuer is going to charge an annual fee and you never use the card, so why not close it. Another good reason to close any credit card account is identity theft. Unused cards can potentially be riskier than the credit cards you use everyday simply because it’s easily forgotten, or as in my case, you may not have control over your account closures. Credit issuers can and will close accounts for inactivity.
Currently there is a lot of conflicting information on the Web about when to close credit card accounts. But if you can no longer abide by the increase in the annual fee and you rarely use the credit or you simply want to rid yourself of the 20 or so cards in your wallet, there are factors to take into consideration. These factors, when strategically done, can leave a minimal impact on your credit score and still allow you to maintain a good credit history.
Based on the five factors that can affect your credit score, payment history makes up a large part of how your credit is scored. So, you may want to think twice about closing a card with a long payment history. Since there is more than one scoring model available, it isn’t easy to say just how much lower you credit score could drop by closing a credit card. But the good news is that whether it’s a department store credit card or a Visa card, you can actually find a good time to close a credit card without impacting your credit score. You’ll find it’s a lot like navigating a crowded Mall on Black Friday, you have to be an educated consumer, regularly monitor your credit reports and carefully consider the following factors before closing any credit card account:
The length of time the account has been open. There is a common misconception that once you close a credit card you eliminate your entire credit history associated with that account. Even if you’re closing an account you’ve had for 20 years, you will still get credit for those 20 years of history. Closed accounts with long credit histories, whether the closure has been initiated by you or the creditor, still count towards your payment history for at least 10 years after the account is closed.
The ratio of balances to credit limits on your accounts. This is also referred to as the amount owed in relation to your credit limits on all of your accounts. So if you were to cancel a credit card with a zero balance, its credit limit would be removed from the calculation, which is 30 percent of your credit score. You can minimize the impact to your balance to limit ratio, by spreading out account closures and keeping older accounts open, if possible. You may also want to consider keeping those credit cards with high credit limits. Before you close or cancel any credit card, and to bolster your balance to limit ratio, you could also request a higher credit limit from another credit card account you use frequently to compensate for the loss of that available credit.
The number of open credit card accounts. If you have more than six, closing one won’t make much difference. If you have too many cards, it might even help your score. Remember to take into account the credit limit of each account and only consider closing those credit cards with low credit limits. Also be sure that the balance is paid in full. Don’t always assume that your account reads zero based on your last statement, call a representative first.
Timing is everything. If you currently have good credit, are a few points worth the additional or impending fees you may have to pay on that credit card account? A little strategy here can go a long way. If you’re considering a loan in the near future, you may just want to wait until your loan application has been approved before canceling any credit card accounts. A lot also depends on the current state of your credit, if your credit is good a few points either way won’t matter, however; if it’s borderline, you may want to put off closing that account if you’re planning to refinance your house.
So while it’s “good practice” to postpone canceling credit cards when considering a mortgage or loan, closing credit card accounts will never be a major worry for those consumers with good credit, especially when the impact is minimal and temporary. Always remember that paying down balances on your current accounts will remain the one consistent factor to a good credit score and a good credit rating.
Sources:
FTC http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre03.shtm
Privacy Rights Clearinghouse http://www.privacyrights.org/fs/fs6c-CreditScores.htm