Although it may seem like the easiest step towards being financially free, closing a credit card can have a major impact on your credit score. Even though it may seem as though you’re making things simple with your money, this decision could have unintended consequences. Before you close that credit account, let’s go over some important information.
What are credit scores?
Your creditworthiness is reflected in a number, the credit score. Credit score ranges between 300-900, a good credit score is generally considered to be above 750. It’s a critical measure for lenders that shows how well you manage your debt. Often, a good credit score leads to better loan conditions and interest rates due to generally lower risk.
How closing a credit card affects your credit score?
- Credit utilisation ratio: It refers to the quantity of credit utilised to the quantity available. With each closed credit card account, the available credit lowers; thus, credit utilisation ratio is potentially increased which influences your score adversely.
- Average age of your credits: The age of your credit accounts is another essential factor in credit rating. Your credit score might decline when you close an older credit card because it could reduce the average age of your credit history. Lenders generally tend to prefer applicants with a more extended credit history.
- Mix of Credit: The diversity of your credit accounts, which can include any range of credit cards, personal loans, and other types of credit, is also a variable used by credit scoring formulas. If you close a credit card, for example, your diversity may be reduced.
When should you close your credit card?
Cancelling a credit card is not at all a bad idea but still demands a serious analysis of the current financial situation and requirements.
1. Monitor your credit utilisation: Ensure that cancelling a credit card doesn’t raise your credit utilisation ratio. To help keep your ratio in the healthy range, you’ll either pay off existing liabilities or request a credit limit boost for your remaining cards.
2. Keep account age in mind: Be mindful, also closing one of your longest credit accounts may seriously dent your credit history. Whenever possible, close newer accounts instead.
3. Check your report: Check your credit report for errors or inaccuracies, then continue reading. Attending any issues you find that can cause potential damage to your credit score might help to minimise the problems later.
4. Follow closure process: To request closure, get in touch with your credit issuer directly. Follow up to make sure the account has been terminated properly and make sure any outstanding balances have been paid off.
In conclusion, the method might seem very straightforward toward cleaning your finances, but in unforeseen ways it may affect your credit score. Therefore, consider the possible effects thoughtfully and seek advice from a financial counsellor, if needed, to make an informed decision that helps you reach your financial goals while keeping your credit profile high.
(Note: Using a credit card carries its own set of risks)
