Having good credit can have a major impact on important aspects of your life. It can determine whether or not you receive a mortgage, an auto loan, a job, and so much more.
In the modern world, having good credit is essential to living comfortably.
Understanding how credit works can be confusing, though. While it’s easy enough to understand that missing payments can lead to a lower credit score, the fact that closing credit can negatively impact your score doesn’t make a lot of sense.
Are you wondering how closing credit cards impacts your credit score? Let’s take a look at everything you need to know.
How Closing Credit Affects Your Credit Score
There are a number of different reasons why closing credit cards can impact your credit score.
One of the reasons for this is that you will lose the available credit limit on that account when you close a credit account. This makes your credit utilization ratio increase, which indicates a higher level of risk to lenders.
It is recommended that you keep your utilization ratio under 30%. However, as a general rule, it is always better to keep your utilization rates as well as possible.
You can calculate your credit utilization ratio yourself by taking the total amount of all of your credit balances and dividing that number by the total amount of all of your credit limits. The percentage you are left with will be your utilization ratio.
Another reason that it can lower your credit score to close a credit card account is that it can decrease the average age of the accounts on your credit report. This is particularly true if you are closing an account that has been open for a long time.
It is helpful to your credit score the older your accounts are. However, it is good to know that when you close accounts that are in good standing, they stay on your credit report for 10 years. If you have accounts that have missed payments and close them, they will stay on your credit report for seven years.
Your credit score might initially decrease when you close a credit card. However, in a few months, your scores will typically rebound so long as you are making your payments on time. If you are planning on applying for other credit, such as an auto loan or mortgage in the near future, don’t cancel a credit card at this time.
When Closing Credit Cards Makes Sense
In certain circumstances, it can make sense to cancel a credit card.
For example, if a card has a high annual fee and it isn’t worth it for you to keep the card, it can make sense to cancel it. This also might be the case if you need to carry a balance on the card but the interest rate is high.
Another good reason to cancel a card is if you are having a hard time managing your debt load. Sometimes canceling a card is the right decision to help you resist the temptation of making purchases you can’t afford.
Are you wondering how credit restoration services work? You can learn more here about every step in the process.
When It’s Better to Keep a Credit Card
There are also sometimes when it makes more sense to keep an account open. One reason you will want to hold off from closing your credit card is if it is the oldest accounts that is on your credit report.
It also might make sense to keep the credit card account open if you are only canceling it because you aren’t using it very often. You also should avoid closing the account if it is one of your only credit cards.
In general, we at KP Credit Hero don’t believe in closing cards. If you’re not using a card, simply put it in a drawer and let your credit age grow. Since credit age accounts for 10% of your credit score, it is rarely a good idea to cancel a credit card account altogether.
How to Safely Close Credit Cards
If you have determined that closing a credit card is the right decision for you, very number of steps you will want to take in order to do so safely.
First, you will want to pay off your credit card before you cancel it. You can come up with a plan for paying it off if you have an outstanding balance by reaching out to the credit card issuer.
If the credit card you have is a rewards card, you will want to redeem any rewards you have so they aren’t wasted.
Next, you can contact customer support in order to let them know that you want to close the account. Ask them to send a confirmation in writing and to note down that the account is being closed at your request.
You will then want to send a short letter in order to confirm your cancellation. You’ll want to put your name, address, phone number, and credit card account number on the letter. If you do not receive a confirmation letter after a month, you will want to follow up and call the issuer.
You’ll also want to make sure that any automatic payments connected to that card are switch to an active card so you avoid missing payments. If anyone else is an authorized user on the account, ask them to destroy their card and tell them that you are closing the account.
Finally, you can shred your card. You can either cut it up into very small pieces and throw away the pieces in different trash cans to make it more difficult for a potential thief to piece together your information.
If You Have Bad Credit, Don’t Worry! Credit Repair Is Possible
At KP Credit Hero, we believe that in most situations it’s not worth it to close credit accounts. This is because you can always keep the accounts open without utilizing the credit card and it can continue building your credit age.
Are you looking for help with credit restoration? You’ve come to the right place!
You can find our available services here and start talking to a credit consultant today.