If you’re thinking about closing a credit card, you might be wondering how it will affect your credit score. Find out the answer to this question and more in our latest blog post.
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Credit cards can be an important part of your financial life, helping you build credit, earn rewards and manage your cash flow. But what happens when you no longer need or want a credit card? Should you close the account?
The answer isn’t always clear-cut, and it depends on a few factors. Here’s what you need to know about closing a credit card and how it could affect your credit scores.
Closing a credit card shouldn’t have a drastic effect on your credit scores.
A common misconception is that closing a credit card will automatically hurt your credit scores. But if you have good payment history and low balances on other cards, your scores probably won’t drop much, if at all.
On the other hand, if you’re trying to improve your scores, closing a card could backfire. That’s because one factor that goes into your credit score is “credit mix,” which is the variety of different types of credit you have, such as revolving credit (credit cards) and installment loans (car loans). So if you close a revolving account like a credit card, it could have an impact on your scores.
The MyFICO Score
The MyFICO score is the most widely used credit score, and it’s the one that lenders generally look at when making decisions about issuing loans. FICO scores range from 300 to 850, with scores of 700 and above considered good or excellent.
If you have a good credit score, closing a credit card will probably only drop your score by a few points. However, if you have a poor credit score, closing a credit card could drop your score by 100 points or more. So, if you’re planning on applying for a loan in the near future, it’s probably best to keep your credit cards open.
The VantageScore is a credit-scoring model developed jointly by the three major credit bureaus: Experian, Equifax, and TransUnion. It’s designed to provide lenders with a more consistent way of measuring creditworthiness and the risk of default.
The VantageScore uses a different scoring range than the FICO score—300 to 850, with 850 being the highest possible score. A score of 750 or above is considered excellent, while a score of 620 or below is considered poor.
When you close a credit card account, your credit utilization ratio goes up because you have less available credit. This can lead to a decrease in your VantageScore.
If you close an account that has a high balance, your debt-to-credit ratio will increase, which can also lead to a decrease in your score.
In general, it’s best to keep your credit card accounts open and active. This shows lenders that you’re using credit responsibly and that you’re able manage multiple accounts successfully.
The Experian Score
There are a number of financial factors that contribute to your Experian Score, and one of them is your credit utilization rate. This is the ratio of your credit card balances to your credit limits. So, if you have a balance of $1,000 and a credit limit of $5,000, your credit utilization rate would be 20%.
One way to lower your credit utilization rate is to close some of your credit cards. This might seem like it would help your score, but it can actually have the opposite effect. That’s because closing a credit card can reduce the total amount of available credit you have, which in turn can increase your credit utilization rate and lower your score.
It’s also important to keep in mind that closing a credit card will not remove it from your credit history. The account will still show up on your report, and the account history will still be factored into your score. So even if you close a card that has a high balance, it could still end up hurting your score in the long run.
The TransUnion Score
The TransUnion Score is one of the most important factors in determining your creditworthiness. This score ranges from 300 to 850, with higher scores indicating better creditworthiness. If you have a high TransUnion Score, you’re more likely to be approved for loans and credit cards with favorable terms. However, if you close a credit card, your TransUnion Score will drop.
The exact impact of closing a credit card on your TransUnion Score depends on several factors, including your credit history and the amount of debt you carry. In general, closing a credit card will lower your score by a few points. However, if you have a strong credit history and low debt levels, the impact may be minimal. If you’re planning to close a credit card, it’s important to check your TransUnion Score beforehand so you can gauge the potential impact.
The Equifax Score
It’s important to know that closing a credit card does not immediately hurt your credit score. In fact, if you have a good credit score, closing a credit card is unlikely to have any major impact.
However, if you close a credit card that you’ve had for a long time, your “average age of accounts” will go down. This could slightly hurt your credit score.
If you close a credit card with a high balance, your “credit utilization ratio” could go up. This could also slightly hurt your credit score.
Overall, the impact of closing a credit card on your Equifax Score is likely to be small – but it could be negative or positive, depending on your individual situation.
The Bottom Line
From a purely credit score perspective, it’s best to keep your credit card accounts open and active – even if you don’t use them – as long as they’re in good standing. This is because closing a credit card account can hurt your credit utilization rate, which is one of the most important factor in your credit score.
Credit utilization is the amount of revolving credit you’re using divided by the total amount of revolving credit you have available. So, if you have a $5,000 credit limit and owe $2,500, your credit utilization rate would be 50%. The goal is to keep your credit utilization rate below 30%, but the lower the better.
When you close a credit card account, you’re essentially reducing your available revolving credit, which can increase your credit utilization rate and hurt your score. So unless you have a good reason for doing so – like avoiding annual fees or preventing temptation to spend – it’s generally best to keep those old accounts open.