Back in 2002, when I was getting rid of my excess credit card debt, I did a stupid thing. I closed my oldest credit card down. I didn’t know, or didn’t care at the time that this move would actually hurt me in terms of building a better credit score.
We all know the importance of a good score: better loan rates, better insurance rates. So today I thought I’d share with you how closing down credit accounts can actually harm your credit score. It does this in two major ways:
1. Raises Your Credit Utilization Ratio
When you close down an active account, the available credit from that account gets removed from your credit file. Therefore, to the credit agencies, you appear to have less available credit at your disposal. They translate this into: not as many people are lending to this person, so they must be a higher risk.
It’s important to keep your credit utilization ratio low. To do this you need to have a lot of credit available to you, but only be using a small amount of that credit. So, if your available balances all add up to $10,000, you need to be using $1,000 – 2,000, not $9,000. From what I hear, this is the case whether you pay it all off each month or carry a balance.
2. Makes Your Credit History Look Younger
The second thing closing an account will do is make you look younger in terms of credit history. One of the keys to a good credit score is a long track record of responsible borrowing. So it’s important to leave those old accounts intact, even if you’re not using it.
But What if You’re Struggling with Debt?
Honestly, the reason I called and cancelled my old credit card accounts back in the day was because I was sick of going in and out of credit card debt. I’d had enough, and just wanted to force myself to quit falling back into those bad habits of spending money I didn’t have.
So, if the whole reason you’re closing those old accounts down is to free yourself from debt and you won’t need your score for a home or auto loan in the near future, then closing them might be the best choice for you anyway. Also, if the card is charging you an annual fee, that may be enough to justify closing it.
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