Why closing down your credit card account is a huge mistake
Credit card companies have been lowering your credit limits, raising your interest rates and imposing new fees – all of this is very frustrating and it may tempt you to close down your credit card accounts. However, your credit score will be damaged if you close the accounts. HelpSaveMyDollars.com explains below:
1. Credit History
When you close down a credit card account, you are erasing valuable credit history, which accounts for 15% of your FICO/credit score. If some of your credit cards have been opened for many years, if not decades, think of all of the past transactions that have been made with that card! By closing down the account, that history is gone, which is seen as a risk to creditors, hence the reason why your credit score will decrease.
2. Available Credit
HelpSaveMyDollars.com has stressed the importance of the debt-to-credit limit ratio, which is the amount you owe (debt) compared to all of your available credit (credit limit). The goal is to have a very low debt-to-credit limit ratio, which will result in a higher credit score. Consider this:
CARD A:
Debt: $5,000
Credit Limit: $10,000
CARD B:
Debt: $2,500
Credit Limit: $5,000
Under the circumstances above, your debt-to-credit limit ratio is 50% (7,500 ÷ 15,000). Let’s say you decide to close Card B. By closing Card B, that $5,000 of credit is not longer available to you and your available credit is now $10,000, instead of $15,000. Without Card B, your debt-to-credit limit ratio is now 75% (7,500 ÷ 10,000). Since you closed Card B, your debt-to-credit limit ratio increased from 50% to 75%, which will significantly lower your credit score!
Also, debt and the debt-to-credit limit ratio makes up 30% of your credit score.
The bottom line: closing down credit cards does not make sense! Unless the card is only 1-2 years old and it hasn’t been used much, then it’s okay to close it down. However, the rule of thumb is to simply keep your credit cards open. If you’re afraid that by keeping so many cards open it’ll tempt you to use them, simply cut the credit cards up and use cash!
Even though most credit card companies are charging inactivity fees, those fees are better than having your credit score damaged! In this day in age, it is extremely tough to receive a mortgage, car loan or even rent an apartment if you don’t have a top tier credit score (760 or above!). Many employers are using the credit score as a factor in determining whether or not they should hire you! The credit score is very important!
Loading ...
