Although it may be easy, there are several things that you need to take into consideration before closing your credit card.
Automatically closing your credit cards is not a slam dunk when it comes to your credit score. Ensure that you gather all the facts before make the decision.
These are things you should consider before you decide to close your credit card.
Will it will affect my FICO Score
Closing you credit card could have two very different outcomes. As all credit scores are different the closing of your credit cards will likely lower your FICO score because it will raise your credit utilization ratio, also known as debt to income ratio.
The credit utilization ration refers to the amount that you have in use in your personal credit portfolio compared to the total amount of credit that is available for your use. This will affect the 30% of the FICO score that is determined by the amount owed.
It’s important to Understanding your FICO Score
This happens because when you cancel your cards instantly it removes the available credit which in-turn raises your credit utilization and thus lowering your FICO ratio.
The key is to strike the right balance between ensuring you maintain a portion of available credit, while not having credit limits with large ceilings that would make lenders nervous about the amount of available credit.
The History of Payments
When you close your account the FICO credit score will not ignore this account. This will mean that although you may have good credit score the closed account will continue to have an effect on your credit score.
Your payment history will continue to account for your 35% of the credit score, if the account is closed or not.
Although the impact of this closed account on the general credit score will lessen with time it is always good that you consider this before closing your account.
The Utilization Rate
The other important element that you need to put into consideration is the amount of credit that you lose. As explained earlier, it’s important to balance your credit to ensure that by closing your account it does increase your ratio.
For example, if you have two credit cards that combine for $2,000 in total available credit. If you carry a month balance of $1,000 on one of the cards you are therefore using 50% of your available credit.
If you close your credit card that has $1,000 available you are now using 100% of your available credit. That reflects very poorly on your credit score because you are using all of your available credit.
Consider Closing Unused and Idle Accounts
Any accounts that aren’t being used or monitored regularly carry inherent risk. Most lenders carry costs for active accounts. This sometimes results in account charges or hidden costs that you may avoid.
These accounts are in most cases target of identity thieves who may defraud you.
Check your Credit Reports Regularly
A great way to avoid risk and ensure accounts aren’t hanging out there for bad guys is to pull your credit report to review your status.
Do not Close Multiple Accounts at Once
As your credit history grows over time it makes your history unique. Although each person’s credit might have different history the credit score will always be calculated based on your credit history, debt to income ratio and your ability to pay back the lenders.
When deciding on closing your credit cards it’s important to understand that make lots of changes at one time could raise red flags to a lender. Consider making incremental changes and monitor the impacts to your score so you achieve the desired result.
Closing your credit cards is ultimately a good decision. The strategy to consolidation and monitoring your credit to achieve your long term success is crucial. Always ensure that you understand each action and its impact before you make any decision.