When you’re looking to clear some of the clutter from your financial life, the first step might be to get rid of credit cards you don’t use often. However, you should understand how closing a credit card will and won’t affect your credit, so you can make an informed decision.
If you’re hoping to erase some past credit mistakes, closing a credit card account isn’t the solution. Your negative payment history remains on your credit report for up to seven years, regardless of whether the account is still open or not. Any outstanding balance will continue to show up as being due until you pay it off. Consider keeping the account so you can continue to reap the benefits of having it show you pay on time every month even if it’s only a small payment.
Your credit utilization ratio is one of several factors that impact your credit scores. Remember in the previous weeks, your credit utilization makes up 30% of your score. This ratio measures how much of your available credit you’re using at any given time. The smaller your ratio percentage, the better your credit score is typically. If you have a total of $5,000 available on credit limits and your current balances are only $1,200, your credit utilization ratio is 24 percent, but if you cancel one card that has a limit of $2,000 because you rarely use it, that can leave you with the same $1,200 balance, but only $3,000 in available credit. Your ratio increases to 40 percent, even though you owe the same amount of money.
Closing a card could have a disproportionately negative impact on your scores if you only have a few credit accounts or one or two that are significantly older than the others. Credit scoring rewards you for having a long credit history and for using a variety of different types of credit. If you close your oldest accounts or your only accounts, they will eventually fall off your credit report shortening your history and perhaps showing a less diverse range of account types.
If you really want to close a credit card, think carefully before doing so. If you anticipate making a large purchase that you’re going to borrow for like a car, wait until after you’ve secured the loan to close any accounts. This way, any negative impact won’t affect the interest rate the bank offers you.
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*lndividual results may vary. Please call for more details and to discuss your own individual situation.