Most of you already know that your credit score is made up of several factors from your credit report that help to determine your creditworthiness, or the likelihood that you will pay back your bills on time. For those that have had difficulties managing debt, you may have been told that once you finally paid down your balances, closing your cards was the solution to never going down that road again. Stop right there.
By closing any or all of your accounts, you may end up hurting your score negatively as the factors that make up your score will be severely affected. Part of your credit score, 15% to be exact, is made up of length of credit history. The longer your accounts have been open, the better it will be for your score. On the other hand, by closing a credit card, the number of accounts used in the calculation will be limited. This won’t happen right away though, as accounts continue to age for 7 to 10 years after they are closed before they fall off your credit report. Keep in mind, by the time it falls off your report, if you’ve opened any new cards since then, your score will drop because the average age of your accounts has decreased.
Credit utilization makes up 30% of your score and is another way that your score can be damaged if you close a credit card. Credit utilization ratio is the amount of debt owed compared to the amount of credit available to you. By closing one of your credit cards, you will decrease the amount of credit available to you and increase your credit utilization and lenders will see that you have used up a lot of your credit and don’t have much left to use.
How many credit cards should you have?
The amount of credit cards you should have all depends on how well you can handle them. Remember, you should keep your balances under the 30% utilization. As long as you don’t charge too much on your cards, you should be able to lower your credit utilization ratio by having more than one card, because you will have more credit available.
Also, keep in mind that 10% of your score is made up of new credit, so if you open too many accounts in a short period of time, you may end up decreasing your score. This is because there is a section in your credit report for inquiries and each time you open a new credit card or apply for a loan, it will show in this section for two years.
This is especially important when opening retail credit cards just to get a one-time discount. These inquiries will also show up on your credit report, so be mindful when applying for cards from a store you barely visit.
10% of your credit accounts for types of credit used, meaning your credit score weighs the different types of credit you have. If you don’t have any installment loans like a mortgage or car payment, your score could suffer. Having credit cards only is not the best idea as you should aim to have at least one installment loan.
If you do choose to close an account, close the newest account to avoid causing too much damage on your score when the card comes off your credit report.
You could also consider closing the card with the highest interest rate, but you will need to pay off the card in full before closing the account. Or, the card that has an annual fee if it’s just sitting in your wallet racking up fees if you’re not using it.
The best way to approach closing a credit card is to do it wisely in order to minimize the damage to your credit score. Try spacing out account closures over time if you plan on closing more than one.
Also, avoid closing accounts before applying for any loans, such as a mortgage, because it can make a difference in the interest rate you will be offered by your lender. A minor change in your score can cause you to lose the best loan terms that could be offered to you.
If you would like additional advice on how to proceed and would like a professional opinion. You can always contact Buildworth Strategies, as they can not only guide on your path but also couple that with a free credit evaluation.
“Credit utilization makes up 30% of your score and is another way that your score can be damaged if you close a credit card”