Closing a Credit Card: Credit cards can be handy when you need to borrow money for a short time. They also help build credit when you pay on time and use them well. But they can also cause trouble if the spending gets out of hand. Closing one card may sound like a small step, yet it can affect your credit score because it changes how much credit you have left and how old your account mix looks. The CFPB says closing an existing card can increase your credit utilization ratio and lower your score.
That is why people do not close a card just on impulse. It is better to think first and see what the card is doing for your credit profile. A card can be useful even if you do not use it much, because older accounts can help your credit history look stronger over time. Experts from Experian and myFICO also note that closing a card can hurt in a few ways, especially by pushing up utilization and lowering the average age of accounts.
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How can a Credit take a hit?
Credit utilisation ratio is the first thing that gets affected. This is the amount of credit you are using compared with the total credit you have. If you close one card, your total credit limit becomes smaller. That means your usage can look bigger even if you spend the same amount. A lower ratio is usually better, and many experts use 30% as a simple guide.
Credit history is another big piece. If you shut an older card, your average account age can go down. That can make your credit file look newer and less steady. A card that has been open for many years is often more helpful than a card opened only a short time ago. Experian and LendingClub both point out that older cards are usually better to keep open when possible.
Payment history can also matter. A card with a strong record of on-time use has been helping your profile. Closing it may not erase your past payments right away, but it does remove one more active line of good credit from your mix. myFICO says closing a card does not help your score just by itself.
Basically a closed card can make your credit picture look tighter and a little less strong. That is why a card with a high limit or long history is often worth keeping if there is no real problem with it.
What factors should you consider before shutting a credit card?
- The annual fees exceed the benefits or payoffs (convenience, ease of use, etc.).
- The card is compromised and has been impacted by a fraud.
- You have security concerns about the credit card or its issuing lender.
- Your usage of the card has affected your score negatively.
- Small, but long-term payments have compounded into a huge debt.
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How can I minimise damage to credit history?
- If the annual fee is manageable or nil, keep an older credit card over a newer one.
- Do not close credit cards in quick succession to avoid folding your credit score in one move.
- Check your credit score before and after closing a card in order to take next steps to steady your credit score.
- For an older, less rewards card, try to use it for small purchases occasionally to keep it from becoming inactive.
