Raising your credit score can seem like a complicated and hard process. Because so many money extremists treat credit cards like the devil, you may be tempted to simply cut up your old credit card to boost your score.
However, getting rid of a credit card is not as simple as it may seem. By canceling or closing a credit card, you could be affecting your credit score more than you think. So let’s take a closer look at the effects of closing a credit card on your credit score.
In general, credit cards have a large role when it comes to your credit score. Part of your credit score (Credit History – 15% of your credit score) is determined by the average age of your revolving credit accounts.
Take a moment to get a copy of your credit report to see exactly how many credit card accounts you have open and take the average of the ages of each of those accounts.
The older the average age of your credit accounts, the higher your score will be. This is because lenders like to see consumers with a longer credit history, as their habits are more predictable.
When you close your credit card, you are lowering the number of cards used in the calculation to find the average age of your accounts. This in turn, will lead to a lower credit score.
Another way that canceling a credit card can hurt your credit is through credit utilization, which accounts for 30% of your credit score. When you close a credit card, your access to money decreases.
If your spending habits stay similar, you will be utilizing a larger percentage of your currently available credit, which will decrease your score. It’s ideal to keep your credit utilization at 30% or less.
As an example, if you owe $3,000 on a card but have 5 different credit cards with a total limit of $10,000 collectively, then your credit utilization rate is right at 30%. If you close a credit card with a $1,000 credit limit, your available credit drops down to $9,000 and now that makes your utilization ratio 33.33%.
A high utilization rate not only hurts your credit score, but it can act as a sign to a lender that you may have limited financial options and are a riskier borrower.
If you are debating about closing a credit card, do so wisely. Closing a credit card, especially an older one with a large credit limit, can have an impact on your credit score. Be sure to conduct thorough research and close the cards with the highest interest rates or annual fees.