In continuation of our series, the 5 Most Common Credit Mistakes Just About Everyone Makes, let’s take a look at why closing credit card accounts can be one of the most damaging things you can do to your credit score. All too often, we hear of people who think they’re doing themselves a favor by paying off and closing out their credit accounts. While this may seem to make sense, closing your active accounts can cost you a major setback if you’re trying to raise your credit score. Here’s why…
Your credit history accounts for nearly 20% of your overall credit rating. The longer you have and maintain active lines of credit, the higher you can expect your credit rating to be. By closing your long-standing accounts, you’re taking away the one thing that proves you’re responsible and trustworthy—your track record for keeping up on your bills. A long history of consistent payment is vital if you want the best rating possible.
Another reason closing your credit accounts could hurt your score is that it can have an effect on your balance-to-limit ratio. A balance-to-limit ratio, or in other words—your credit utilization—is the difference between your credit card limits and how much you’ve charged and/or owe. Here's an example:
Let’s say you have 2 credit cards, both with $5000 credit limits. One card has a balance of $2500, while the other has no balance at all. Your utilization is 25% ($10,000 in limits for both/$2500 in balances) which is pretty good.
Now let’s pretend you close that second card. Your utilization just doubled from 25% to 50% because you closed the second card you weren’t using. I’ve actually seen credit score swings of around 80 points just by playing with utilization.
Keeping your credit utilization below 20% is recommended, and by closing any one of your cards, it could elevate that percentage to a more dangerous level and result in a drop to your credit score.
When it comes to improving your credit, the manner in which you use your charge cards can make a big difference, and it’s always a good idea to take careful consideration with any changes you decide to make. There are, of course, good reasons for some people to close their credit accounts, but in most cases, closing them could really hold you back.
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