Closing your credit card can have a devastating effect on your credit score, depending on the prevailing circumstances. It’ll most likely lower your credit score, even if you’re no longer using the card.
So, if you’re planning to close your credit card account, take a moment to learn how it’ll affect your credit score and your chances of getting credit in the future.
Effects of Closing a Credit Card on Your Credit Score
While you may have valid reasons for closing your credit card, it’s important to talk to a credit expert before you make that call. For instance, if you’re closing your card because of your bad spending habits or high-interest rates, you should consult one of the best credit fixing companies, like The Phenix Group, for advice on what to do before you close your card.
Here are the main effects of closing your credit card on your credit score:
Higher Credit Utilization Ratio
The credit utilization ratio is the total amount of credit available to you versus how much of that credit you have spent without paying back. A bad credit utilization ratio means that you’re about to max out your credit card–this lowers your credit score immediately.
Unfortunately, though, you cannot pay a credit card with another credit card. Banks and credit institutions don’t permit their users to pay their credit card balances with other credit cards.
So, if you increase your credit utilization ratio by closing your credit card, you’ll just minimize your chances of getting credit. This is why it can be beneficial to have multiple credit cards open. If you have several credit cards, your credit utilization ratio takes into account the total debt you carry on all your cards.
Therefore, having more credit cards means that your total credit card balance is spread across different cards, thus increasing the total amount of credit you can utilize and boosting your credit utilization ratio. Closing one credit card reduces the available credit and worsens your credit utilization ratio, which causes your credit score to drop.
Reduced Credit History
Closing your old credit card shortens your credit history and ultimately causes your FICO credit score to drop. This might not occur immediately, but it’ll surely happen once the closed credit card account disappears from your credit report. It can take up to ten years before your closed credit cards stop contributing to your FICO credit report.
When to Keep Your Credit Card
Now that you understand the adverse effects of closing your credit card, it’s important to learn the circumstances under which you should keep your card and when you should close it. Here are the situations in which keeping your credit card makes more sense than closing it:
- You want to apply for a loan and you want to have as many credit score points as possible to boost your eligibility.
- Your credit score is still healthy and you don’t want it to drop below the good credit range.
- There’s no real reason for closing the card.
- You still have outstanding credit balances on the card and you don’t want to hurt your credit utilization ratio.
- It’s your oldest credit card and you don’t want to shorten your credit history by removing it from your credit report.
When to Close Your Credit Card
Although it’s logical to keep your credit card, sometimes, it makes more sense to close it. Here are the main reasons why you might have to close your credit card:
- You have poor spending habits.
- You’re divorcing your partner and you need to close your joint credit account.
- It’s a high-interest card that you can no longer afford.
- It’s an airline credit card and you want to end your ties with the airline.
- It’s a retail credit card that you no longer need.
In short, you shouldn’t close your credit card if it’ll negatively affect your credit score. The best thing to do is to talk to a credit repair expert from The Phenix Group for guidance!
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