Saturday, November 10, 2012

The Impacts of Closing a Credit Card to Your Credit Score

Making a decision about closing a credit card is part of card debt management. It is true that the more cards you have, the greater the possibility that you will incur debt. However, you should not rush into cancelling your card. There is a principal element that you should never forget: your credit score. Closing an account can negatively affect your credit rating.

Your credit score is what lenders use to determine your interest rates among others. It is comprised of a three digit number and is formally called the FICO score.

The Truth Behind the Myths About Card Cancelation and Credit Scores

There are two popular misconceptions about closing an account. First is that cardholders will be penalized when they have high credit available; thus, it is better to close an unused account. Second is that when a consumer closes an account, everything that's associated with that account will be erased. These two are definitely not true since FICO does not view having too much available credit as a negative attribute. This only becomes a problem if you resort to problematic tactics, such as opening numerous cards to gain high credit limit.

With regard to the elimination of the account history, this is impossible. You can close all the accounts you don't use or they can remain inactive for ten years. All of these pieces of information will remain in your credit report.

Can You Raise Your Score by Closing Your Old Accounts?

The short answer to this question is no. This may seem a little counter-intuitive for you; after all, you are cleaning up your profile by eliminating inactive or old cards. Experts often advise people against canceling accounts, most especially old ones. Fifteen percent of your credit score depends on the length of your credit history. In other words, the longer your account exists, the higher your score can get.

Another thing that you may want to know about is the credit utilization ratio. This is another aspect that the FICO score takes into consideration. Basically, this uses your total available credit versus the total amount you have utilized. Unlike your credit age, the higher the utilization ratio, the lower your score gets. When you close your old or unused card, you are, in essence, wiping out a part of your available credit, thereby, increasing your utilization ratio.

The people at FICO say that there is actually no good reason why you should close an account. The situation may vary, but you will always end up hurting your credit score. However, if you think about it, there are two main benefits that you will get when you close your account. First is that it is beneficial when you have too many cards, such as about half a dozen or more. You get to simplify your life, since it is almost impossible to keep track of your expenses and bills. Second, you reduce the risk of having your old card stolen or utilized by another person without your knowledge.

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