Closing Out a Credit Card: Does It Really Hurt Your Credit Score?
One of the hardest responsibilities of being a consumer is managing a credit card account and maintaining good standing in your credit score. What’s more, you have to do all that with an endless array of risks to your financial capacity. So, you might be thinking that the best solution to this dilemma is to close out your credit card. But experts say that this could actually hurt your credit history instead.
Most of us think that closing a credit card would mean an increase in your credit score. Experian said in a recent study, “It’s a common fallacy that closing credit cards will always help your credit rating.” They said that people should instead “focus more on the amount of available credit being utilized, making sure you are not over extending your debt beyond levels you can manage. Closing good accounts could actually hurt your credit rating.”
Now, you might be wondering why. John Janney, past president of the National Financial Awareness Network, says that “Closing a credit card affects two factors used to calculate credit score – length of credit history, which accounts for 15% of your score, and balances — also known as debt to available credit ratio — which accounts for 30%.” Janney added that it’s best to close the youngest credit card account that has the least credit limit to minimize the damage to your score.
Janney says, “Closing older accounts or accounts with larger credit limits may lower your score, because it makes you look, at least on paper, as if you’re new to the credit game and have less credit to work with… My recommendation for someone wanting to close a credit card to is shift balances from the youngest card to the oldest card and close the younger account once its balance reaches zero – not before. The credit effects may be less harmful, but they will also be temporary.”
If you really have to close a credit account, you have to determine the reason and understand it to ensure you are making the right decision. MyBankTracker CEO Alex Matjanec said that, for example, your problem is having a credit card with a very high APR. Instead of closing it, you can negotiate with your bank or issuer first. You can also choose to consolidate multiple accounts for one easy payment.