Closing a Credit Card: Impact on Credit Score Explained

Are you suffering from late payment charges for your credit and thinking of closing it? Well, you might need to reconsider the closing of your card. Sure, credit cards have become an essential part of our lives today. They offer us convenience, rewards, and a credit history. But this convenience comes with the responsibility of managing your credit well. One common question that arises is: Does closing a credit card impact your credit score? This blog will dive into the details of this question and give you valuable insights to make informed decisions about your credit card.

Closing a Credit Card: Impact on Credit Score

Closing a credit card can indeed impact your credit score – in different ways. Let’s see the major factors:

1. Credit Utilisation Ratio

This is the percentage of your available credit that you are using, and it has a big impact on your credit score. If you close a credit card, your total available credit goes down, which can increase your credit utilisation ratio. Closing a credit card with a high credit limit is a big no-no for your credit score.

2. Average Age of Accounts

The credit scoring model also considers the average age of your accounts. The longer your credit history, the better. When you close an older credit card, the credit history will be shortened, which will negatively impact the credit score.

3. Credit Mix

Credit mix refers to the number of credit accounts you have, from credit cards to loans and mortgages. Most lenders look favourably upon a diverse credit mix. Closing a credit card reduces your credit mix and, hence, may have a small impact on your credit score. But this impact will be negligible if you have other credit accounts in good standing.

ALSO READ: How To Redeem And Use Credit Card Reward Points

When to Close a Credit Card

Although closing a credit card can hurt your credit score, there are times when it’s necessary. Here are the scenarios to consider:

• High Annual Fees: If you have a credit card with a high annual fee and you never use it, closing it will save you money. Weigh the impact on your credit score before you decide.

• Credit Card Abuse: Closing a credit card can help if you’re overwhelmed by credit card debt or making late payments. But you need to address the underlying issues and create a plan to improve your credit health.

• Unused Credit Cards: If you have many credit cards lying around and never use them, the idea of closing some will cross your mind to declutter your finances.

Alternatives to Closing Your Credit Card

Instead of closing a credit card, think of what else you can do to meet your financial goals. Maybe you can downgrade a credit card with no annual fee version. That way, you preserve the credit limit and account history without paying the high fees.

ALSO READ: Manage Your Credit Card Expenses With OneCard App

How to Close a Credit Card Without Affecting Your Credit Score

When closing a credit card, you have to be very careful not to affect your credit score. Here are the steps to take:

• Pay-Off Balances: Pay off your other credit cards’ balance to lower your credit utilization rate.

• Avoid Closing Your Oldest Card: Don’t close your oldest credit card because it will reduce the length of your credit history.

• Downgrade the Card: Switch your card to a lower or no-annual-fee version. This will preserve your credit card limit and the account history.

• Redeem Credit Card Reward Offers: Redeem any outstanding credit card reward offers before closing the card so you won’t lose the rewards earned.

ALSO READ: 5 Ways To Use Credit Card

In summary, the impact of closing a credit card on credit score is a complex issue. This depends on the credit utilisation ratio, length of credit history, timing, and credit card rewards and offers. If you ever decide whether to close a credit card, it will always be beneficial to consult a financial advisor. Keep in mind that good credit takes time to develop, so one should be careful with their financial well-being.

FAQs

1. Does closing a credit card affect my credit score?

Yes, it can increase credit utilization and reduce account age, impacting your score.

2. When should I consider closing a credit card?

Close cards with high credit card fees and charges, debt issues, or if unused, but check score impact.

3. What are alternatives to closing a credit card?

Downgrade to a no-fee version to keep history and credit limit.

4. How can I close a card without hurting my credit score?

Pay off balances, avoid closing your oldest card, and redeem rewards first.