Once you have paid off a credit card and worked your way out of debt, it may be tempting to close the card. Before you do, there are some truths that you should know. Closing a credit card can actually do more harm than good to your FICO score. Here are four things to know before you close any of your credit cards, past or present:
It Will Disappear
Most of the information on your credit report remains there for a minimum of seven years. That information includes both beneficial and damaging information. If you have paid off your credit card, whether it was on time or late, that information is boosting your score. If you close the card, it will disappear from your report in seven years and, thereby, stop boosting your FICO score.
It Will Affect Your Utilization
Many people don’t understand that utilization is often just as important as your credit score. Utilization works like this: if you have multiple credit cards with $1000 balances, and you are carrying one with a $500 balance and another with a zero balance, your utilization is 25 percent. If you close the card with a zero balance, your utilization becomes 50 percent. It is generally considered most beneficial to carry a utilization percent of 25 or less. As your utilization percentage rises, your FICO score drops.
Too Many Closed Accounts are Suspicious
If you have multiple cards that you aren’t using, closing one will not likely hurt your score. Closing them all, however, will raise a red flag to any potential creditor looking at your report. Whether a bank or other financial institution grants you a line of credit is as much opinion as it is about your FICO score. If you have a great score and too little revolving credit, the creditor may wonder why. In the same vein, if you have too many credit cards, a creditor may shy away from offering you more. The key is all about balance!
Close the Low, Keep the High
If, after sitting down with your credit report, you are still insistent upon closing at least one or two of your unused cards, closing those with a low balance won’t hurt your score like closing those with a high balance will. Be sure to keep the cards with which you have a long history; closing cards you’ve had for a short while will not affect your score in the same manner. Again, it is all about utilization; having a good understanding of how it works will benefit you greatly.
When you are applying for a mortgage or car loan, the lender may advise you to close unused credit cards. Do not follow this advice blindly. In many instances, it is far more beneficial to keep these cards open than it is to close them. Remember: you can always look for a different lender who is willing to work with your credit report as is!
Andrew Bennett is a financial consultant helping those with less than perfect credit obtain a credit card to rebuild their credit history.
